Pharmaceutical Pricing Strategies

H E A LT H C A R E

Pharmaceutical Pricing Strategies Price optimization, reimbursement and regulation in Europe, US and Japan By Steven Seget

Steven Seget Steven Seget is Principal at Delphi Pharma, and provides independent strategic consulting services to the pharmaceutical and biotechnology industries. Steven previously managed the strategic healthcare consulting function at Datamonitor and graduated from the London School of Economics in Accounting & Finance. [email protected]

Delphi Pharma provides strategic, financial and market–based solutions to clients, focusing primarily on the portfolio management, business development and licensing functions. Delphi Pharma combines an extensive research network, applied analytical expertise and an established track record to deliver high value results and measurable impact to its clients. www.delphipharma.com

Copyright © 2005 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy.

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Table of Contents Pharmaceutical pricing strategies

Executive Summary

12

The importance of price optimization

12

Pricing and reimbursement in North America

13

Pricing and reimbursement in Europe

14

Pricing and reimbursement in Japan and the rest of the world

15

Pricing strategies for new drugs

16

Pricing strategies for established drugs

17

Chapter 1

The importance of price optimization

20

Summary

20

Introduction

21

Maximizing return on investment R&D productivity shortfall Key patent expiries

21 21 25

Healthcare cost containment Cost-containment initiatives Cost containment in pharmaceutical expenditure

28 30 30

Key issues Price optimization Reimbursement regulations Reference pricing Pharmacoeconomic evaluations Parallel imports Generic substitution

32 32 33 37 39 42 44

Hot topics US reimportation Medicare Drug Benefit EU enlargement Price harmonization Pricing and reimbursement hurdles

46 46 47 48 48 49

iii

Chapter 2

Pricing and reimbursement in North America

51

Summary

51

Introduction

52

US pricing regulations Medicare Medicaid Private healthcare

52 53 55 56

Recent developments in the US The 2003 Medicare Prescription Drug Act Expanded access… Improved drug compliance… Higher utilization… Price comparison tool… Medicare drug benefit formularies… Medicaid budget crisis Price controls in Maine? Florida’s Medicaid drug rebates

57 58 60 60 61 62 62 63 65 68

Pharmacoeconomics in the US Pharmacoeconomics in public healthcare provision Pharmacoeconomics in private healthcare provision Managed care pharmacoeconomic submissions Future use of pharmacoeconomics in the US

69 69 69 70 71

Parallel imports in the US Developments in cross-border trade Reimportation task force report… State-level action…

73 76 76 78

Generic substitution in the US The Waxman-Hatch Act Pediatric exclusivity provisions Anti-competition agreements Delaying tactics and 180-day exclusivity Biogenerics Trends in generic usage ‘March-in’ law…

79 79 80 82 84 85 87 87

Future pricing scenarios in the US Best case pricing scenario Worst case pricing scenario Most likely pricing scenario

87 88 89 89

Canadian pricing regulations Federal measures Provincial measures Driving down prices Reimportation

90 91 92 93 94

iv

Chapter 3

Pricing and reimbursement in Europe

97

Summary

97

Introduction

98

European pricing regulations France Recent developments… Germany Recent developments… Italy Recent developments… Spain Recent developments… The UK Recent developments…

98 100 102 104 105 108 110 113 115 120 120

Pharmacoeconomics in Europe France Germany Italy Spain UK

122 123 124 125 126 127

Parallel importing in Europe Penetration of parallel imports Price differentials… Initiatives to encourage use of parallel imports… Ability to obtain a license to import products… Regulations and key legal decisions Merck versus Stephar… Bayer (Adalat)… Bristol-Myers Squibb versus Paranova… The Silhouette case… The Maglite case… The Davidoff case… Recent developments GSK’s supply restriction in Greece… Lack of regulatory framework in France… Novo Nordisk’s supply of Actrapid Novolet in Spain… Pfizer’s direct distribution to pharmacies in Spain…

131 132 132 133 133 133 134 134 134 135 135 136 136 136 137 138 138

Generic substitution in Europe The mutual recognition procedure Future changes in European generics legislation Government initiatives encouraging generic uptake

139 141 142 144

EU accession Drug pricing policies and reimbursement post-accession Parallel trade post-accession Generics post-accession

144 146 147 149

v

Future pricing scenarios in Europe Best case pricing scenario Worst case pricing scenario Most likely pricing scenario

Chapter 4

151 151 152 153

Pricing and reimbursement in Japan and the rest of the world

156

Summary

156

Introduction

157

Japanese pricing regulations Recent developments

157 159

Pharmacoeconomics in Japan

162

Parallel importing in Japan

163

Generic substitution in Japan

164

Future pricing scenarios in Japan Best case pricing scenario Worst case pricing scenario Most likely pricing scenario

165 166 166 167

Australian pricing regulations Benchmark pricing Cost plus method Average monthly treatment cost Prices for new items

168 170 170 171 171

Chinese pricing regulations

171

Chapter 5

Pricing strategies for new drugs

174

Summary

174

Introduction

175

Pricing strategies in early-stage development Therapy area analysis Epidemiology analysis Treatment delivery analysis Market needs analysis Pricing analysis Cost analysis Economic analysis Decision-maker analysis Market research Initial assessment of drug candidates

175 177 177 177 178 178 178 179 182 183 184

Pricing strategies in mid stage development

186

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Evaluating opportunities Case study: Aventis appeal against NICE… Improving product value Case study: Johnson & Johnson’s Concerta…

187 190 191 191

Pricing strategies in late stage development Sub-population analysis Choosing outcomes Case study: Merck’s Zocor (simvastatin)… Patient reported outcomes Case study: Pfizer’s Viagra… Head-to-head trials Phase III pharmacoeconomic studies Phase IV studies

192 193 194 195 196 197 198 200 202

Pricing strategies for new product approvals Submission dossiers Identifying key decision makers Failure to secure reimbursement Working with decision makers… Case study – Eli Lilly’s Xigris… Applying pressure through lobbying… Case study – Amgen’s Aranesp… Brokering deals… Case study – Celebrex in France… External support EU launch order First choice countries… Second choice countries… Third choice countries… Fourth choice countries… Global price optimization

204 204 206 207 207 208 209 209 211 212 213 213 215 215 216 217 217

Chapter 6

Pricing strategies for established drugs 221

Summary

221

Introduction

222

Strategic pricing of reformulations Benchmarking relative pricing Patient expansion strategies Patient switching and generic defence strategies Generic defence reformulations

222 222 224 226 231

Strategic pricing at patent expiry US patent expiry European patent expiry

232 233 233

vii

Chapter 7

Appendix

236

Glossary

236

Sources

238

viii

List of Figures Figure 1.1: Figure 1.2: Figure 1.3: Figure 1.4: Figure 1.5: Figure 1.6: Figure 2.7: Figure 2.8: Figure 2.9: Figure 2.10: Figure 3.11: Figure 3.12: Figure 5.13: Figure 5.14: Figure 5.15: Figure 5.16: Figure 6.17: Figure 6.18: Figure 6.19:

Declining trend in number of NDAs and NMEs approved, 1995-2004 23 Rise in the cost of drug development, 1975-2000 25 US patent expiries for top ten selling drugs, 2004 27 Trends in healthcare spending as a proportion of GDP between 1998 and 2002 29 Pharmaceutical expenditure as a share of total healthcare expenditure in 2002 30 Key drivers and resistors of pharmacoeconomics 41 Average branded drug prices in selected countries compared with the US 58 Distribution of 2003 Medicare drug expenditure 59 Average annual growth rates of total Medicaid spending, 1995-2002 64 Drivers and resistors of parallel imports into the US 75 External reference pricing in Europe, 2004 99 The NICE appraisal cycle 129 Stop-go decision portfolio review phase IIa 189 Use of economic evaluation 193 Optimal country-by-country sequence launch for entry into the EU-15 countries 214 Global pricing and the interaction between countries 218 Comparative analysis by strategic type – relative average US pricing four quarters following launch for 25 reformulations 224 Relative average US pricing – patient switching versus generic defense 228 Relative average US pricing 12 quarters following launch in patient switching reformulations 229

List of Tables Table 1.1: Table 1.2: Table 1.3: Table 2.4: Table 3.5: Table 3.6: Table 3.7: Table 4.8: Table 4.9: Table 4.10: Table 6.11:

Number of NDAs and NMEs approved by the FDA, 1990-2004 R&D expenditure within the US and abroad by PhRMA members, 1980-2004 Trends in healthcare spending as a proportion of GDP between 1970 and 2002 Future pricing scenarios in the US Use of economic evaluations in different European countries Generic substitution in across European countries Future pricing scenarios in Europe Co-payments for drugs/services in Japan Classification for price premium (Japanese healthcare system) Future pricing scenarios in Japan Calculating relative pricing – Prozac 20mg versus Prozac Weekly

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22 24 28 88 123 144 151 158 159 165 223

x

Executive summary

11

Executive summary The importance of price optimization Maximizing prices and securing reimbursement status for a product is increasing in importance, as pharmaceutical companies seek to ensure that they achieve a high return on investment from current and future drugs in light of a sustained R&D productivity shortfall and a wave of impending blockbuster patent expiries. At the same time as the pharmaceutical industry faces pressure to maintain revenue and earnings growth, healthcare providers face cost containment pressures of their own. Over the past decade, there has been significant growth in global healthcare expenditure, with healthcare representing a growing share of gross domestic product (GDP) in developed nations. In June 2004, the Organization for Economic Co-operation and Development (OECD) published data demonstrating that the annual increase in per capita spending on healthcare across OECD countries has outstripped overall economic growth per capita by approximately 70% between 1997 and 2002. The key levers of cost containment set the current price optimization climate, which involves a proliferation of reimbursement regulations and the use of reference pricing systems. Price optimization is also significantly affected by a number of related disciplines, including the application of pharmacoeconomic evaluations, the impact of parallel trade and reimportation and the pricing effects of generic substitution. Alongside the key pricing issues of cost-containment, pharmacoeconomics, parallel imports and generic substitution, a number of hot topics have also been widely debated over the last few years. These include US reimportation, Medicare reform, EU enlargement, price harmonization and pricing and reimbursement hurdles. Each topic will covered in more detail in later chapters of this report, but below is a summary of the key trends and implications.

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Pricing and reimbursement in North America Unlike the other major pharmaceutical markets, the US does not have a government-sponsored health insurance plan that ensures access to healthcare for the entire population. As a result, the national government does not directly influence the prices of pharmaceuticals, but allows drug prices to be determined by the free market. Drug prices are influenced by competition between rival products, the market size of the drug, the number of substitute products, and the costs of R&D of new products. Recent development in the US include the coming into force of the 2003 Medicare Prescription Drug Act, a Medicaid budget crisis and state-level pricing initiatives in Maine, Florida and elsewhere. These developments occurred in the context of a market with increasing high relative pharmaceutical prices. Under the best case pricing scenario for pharmaceutical companies in the US, the 2003 Medicare Prescription Drug Act would lead to wider access, improved compliance and increased utilization. Prices for effective drugs would remain high while volumes would increase in line with the widened coverage. A best case pricing scenario would also involve a cut-back on state-level activity involving the negotiating of rebates for Medicaid. Rebate schemes would be limited to Maine and Florida and would not be extended further. Federal level and high court-level intervention would limit state-rebates. Finally, a best case scenario would involve re-enforced protection from Canadian reimportation. Legislative plans will be shelved and state-level importation programmes will be successfully challenged in the courts and limited though limitations in supply. Generic legislation will continue unchanged, but pharma companies will work harder to challenge generic entry and limit uptake through line extensions and reformulations.

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Pricing and reimbursement in Europe The major European pharmaceutical markets operate a variety of different healthcare systems subject to differing cost containment measures. In pricecontrolled countries, such as Spain and Italy, budgetary responsibilities and controls are devolved to the regional level. In traditional prescriber-led markets, such as the UK and Germany, national hurdles including NICE and positive lists have been introduced. Historically, European regulatory authorities have taken different approaches to controlling public drug benefits, with some focusing on limiting demand, as evidenced by the devolved budgets found in Germany and the UK, and others on regulating price, as is found in France, Italy and Spain. However, some countries, including Italy and Spain, are adopting both approaches, extending greater regional autonomy for healthcare and budget delivery. Over the next five years, the most likely European pricing scenario will involve continued convergence of prices across different markets, resulting from the ongoing pressures of parallel trade and reference pricing. Average prices will tend towards the middle of the current range, with high price markets such as the UK and Germany lowering prices and low price markets such as France, Italy and Spain increasing average prices, particularly for innovative therapies. In the most likely pricing scenario the impact of pharmacoeconomics, parallel trade and generic substitution will continue to increase gradually. These indirect cost containment measures will continue to play an important role in managing the healthcare spend for all European Governments. The accession of 10 new countries to the EU will have a small, but negative, effect on prices throughout the EU-15.

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Pricing and reimbursement in Japan and the rest of the world The Japanese healthcare system is characterized by high pharmaceutical expenditure and price controls are an important part of the system. The upper limit for pharmaceutical prices in Japan is the NHI drug price. The NHI drug price list fixes the names and prices of drugs for which healthcare providers can be reimbursed under Japan’s health insurance programs. The reimbursement price is determined separately by the MHLW. All drugs included in the NHI drug price list are fully reimbursed except for a patient co-payment. The primary driver behind expected reform in Japan’s pharmaceutical pricing structure is likely to be the rate of economic recovery. In a depressed economy, as experienced by Japan since the late 1990s, the government will continue to look for places to cut costs rather than put in place radical changes to existing systems. Over the next five years, the most likely pricing scenario prevailing in Japan will involve a continuation of the current reimbursement reform led by biennial pricecutting. By weighting the cuts against generic and ‘me-too’ products, innovative products can still continue to receive premium prices, while the overall drugs bill is reduced. Price setting is likely to become more complex in the Japan, with the addition of health economic data and pro-generics regulations to the current reference pricing system. However, the Japanese market will continue to be protected from parallel trade. With no principle of international exhaustion in Japan, companies will continue to prevent their products from being imported from other countries using their trademark rights.

15

Pricing strategies for new drugs Much can be done in the very early stages of development to lay the groundwork for a robust reimbursement strategy throughout the product lifecycle. Ultimately, the goal of a reimbursement strategy should be to ensure that a product achieves a sustainable pricing and reimbursement status for a particular patient population, which will provide a return on investment. Consequently, pharmaceutical companies must be able to make decisions that enable them to steer product development to ensure that these aims are met. Once the Phase II review process has been completed and a defined target population for a drug has been identified, Phase III trials represent the primary opportunity for collect evidence that will demonstrate the benefits offered by products. Companies must, therefore, design trials that are geared to demonstrate superior clinical effectiveness (efficacy, safety and side-effect profile) with respect to other treatment options and to generate pharmacoeconomic data that enables a thorough analysis of costs and outcomes in comparison with other treatment options. To maximize investment in work carried out during development, it is imperative that companies ensure that the evidence that demonstrates product value and supports the case for reimbursement is effectively communicated and taken into account in the decision-making process. Companies must therefore identify and exploit opportunities to communicate the value of products and influence decisionmakers’ thinking. Of the five major pharmaceutical markets in the EU, the UK should be chosen first for a product launch. This is because drugs are allowed to enter into a high value market that enables companies to command prices without the limitation set by reference pricing.

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Pricing strategies for established drugs The pricing of a reformulation relative to other formulations, within its brand franchise can be divisive in dictating the success of reformulation strategies. To achieve growth, manufacturers must often strike a balance between the premium pricing of reformulations (and reaping the potential for price driven sales growth) and ensuring that pricing remains competitive and does not restrict volume driven growth. While price and volume driven growth can often be achieved, in some instances, due to the existence of cost sensitivities, pricing reformulations at a discount to existing formulations within their brand franchises can be employed a tactic to drive uptake of a reformulation. Patient expansion strategies seek to access new opportunities and grow sales in an additive manner. The ability to access new treatment settings, patient populations and indications often requires significant differentiation from existing formulations of the parent molecule. Successful execution of these strategies requires reformulations to be differentiated, offering value to stakeholders that can be translated to premium pricing. Discount pricing can be particularly important in providing an additional switching incentive for physicians and patients in instances where reformulations are poorly differentiated from their predecessors. In contrast to patient expansion strategies, patient switching and generic defense reformulations are often priced at a discount to their predecessors following launch. Implementing a price decrease at or prior to patent expiry allows brands to compete on a price basis with generics, and may enable the company to maintain its relationships with wholesalers and pharmacists by offering a known and trusted product and service while going some way to matching the generics manufacturers on price.

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CHAPTER 1

The importance of price optimization

19

Chapter 1

The importance of price optimization

Summary Maximizing prices and securing reimbursement status for a product is increasing in importance, as pharmaceutical companies seek to ensure that they achieve a high return on investment from current and future drugs in light of a sustained R&D productivity shortfall and a wave of impending blockbuster patent expiries. At the same time as the pharmaceutical industry faces pressure to maintain revenue and earnings growth, healthcare providers face cost containment pressures of their own. Over the past decade, there has been significant growth in global healthcare expenditure, with healthcare representing a growing share of gross domestic product (GDP) in developed nations. In June 2004, the Organization for Economic Co-operation and Development (OECD) published data demonstrating that the annual increase in per capita spending on healthcare across OECD countries has outstripped overall economic growth per capita by approximately 70% between 1997 and 2002. The key levers of cost containment set the current price optimization climate, which involves a proliferation of reimbursement regulations and the use of reference pricing systems. Price optimization is also significantly affected by a number of related disciplines, including the application of pharmacoeconomic evaluations, the impact of parallel trade and reimportation and the pricing effects of generic substitution. Alongside the key pricing issues of cost-containment, pharmacoeconomics, parallel imports and generic substitution, a number of hot topics have also been widely debated over the last few years. These include US reimportation, Medicare reform, EU enlargement, price harmonization and pricing and reimbursement hurdles. Each topic will covered in more detail in later chapters of this report, but below is a summary of the key trends and implications.

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Introduction Business Insight’s Pharmaceutical Pricing Strategies report outlines the critical importance of price optimization in the pharmaceutical industry. Navigating a pricing policy through many different market settings and competitive environments is difficult for companies to coordinate. A centralized, product-based view allows for consistent development and positioning efforts, but this must be balanced against an individual country-level view that accounts for the specific pricing nuances in each of the key markets. It is critical, therefore, that in order to manage the pricing function effectively, pharmaceutical companies have a clear understanding of both the key strategic issues surrounding pricing as well as the different pricing environments found across North America, Europe and the rest of the world.

Maximizing return on investment Maximizing prices and securing reimbursement status for a product is increasing in importance, as pharmaceutical companies seek to ensure that they achieve a high return on investment from current and future drugs in light of a sustained R&D productivity shortfall and a wave of impending blockbuster patent expiries.

R&D productivity shortfall The pharmaceutical industry currently faces a deepening research and development productivity shortfall. This prolonged decrease in R&D productivity can be clearly illustrated by examining annual Food and Drug Administration (FDA) data relating to the number of new drug applications (NDAs) and new molecular entities (NMEs) approved by the FDA each year.

Despite the industry enjoying a wave of high innovation during the early 1990s, peaking in 1996 when 131 NDAs and 53 NMEs were approved, R&D productivity has 21

declined on almost a year-on-year basis. In 2004, the number of NDAs stood at 94 and the number of NMEs approved at 36, representing an improvement over previous years. However, over the last years the trend has been for an annual decline of 3.5 in the number of NDAs and 1.7 in the number of NMEs. Table 1.1 and Figure 1.1 show the trend in the number of NDAs and NMEs approved by the FDA between 1990 and 2004. Table 1.1: Number of NDAs and NMEs approved by the FDA, 1990-2004 NMEs approved 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

23 30 26 25 22 28 53 39 30 35 27 24 17 21 36*

NDAs approved 64 63 91 70 62 82 131 121 90 83 98 66 78 72 94**

*

FDA has not yet published final 2004 figures, 36 NMEs were reported by MedAdNews in February 2004 ** FDA reported 94 new NDAs approved in 2004 up to end of November Business Insights

Source: FDA, MedAdNews

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Figure 1.1: Declining trend in number of NDAs and NMEs approved, 19952004

140 120 100

NDAs approved

80

NMEs approved

60

Trend (NDAs approved)

40

Trend (NMEs approved)

20

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

0

Business Insights

Source: FDA, MedAdNews

At the same time as R&D productivity levels have slowed, R&D expenditures in the pharmaceutical industry have continued to increase. According to the industry group Pharmaceutical Research and Manufacturers of America (PhRMA), R&D expenditures have increased significantly year-on-year for the last decade. Total R&D spend has increased from $1,977m in 1980 to $38,794m in 2004 representing a compound annual growth rate of 13.2%. Table 1.2 shows trends in R&D expenditure within the US and abroad by PhRMA members between 1980 and 2004.

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Table 1.2: R&D expenditure within the US and abroad by PhRMA members, 1980-2004

US Non-US* Total

1980

1985

1990

1995

2000

2001

2002

2003

2004**

1,594 428 1,977

3,379 699 4,078

6,803 11,874 21,364 23,502 25,655 27,065 30,644 1,617 3,334 4,667 6,221 5,357 7,388 8,150 8,402 15,208 26,031 29,723 31,012 34,453 38,794

* Spend by PhRMA member companies in regions outside US ** PhRMA estimates Business Insights

Source: FDA, MedAdNews

The expenditure required to develop new drugs has also increased over the last 20 years. In 2001, the Tufts Center for the Study of Drug Development (CSDD) revised its estimate of the average cost to develop a new prescription drug to $802m. This figure was the result of a Tufts study using information obtained directly from research-based drug companies. Tufts performed a similar study over a decade ago estimating that the average cost of a new drug developed in 1987 was just $231m, without adjusting for interest and inflation rates. The $231m figure in 1987 would be equivalent to $318m in 2000 US dollars, adjusted for inflation. Figure 1.2 shows the rise in drug development costs between 1975 and 2000.

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Figure 1.2: Rise in the cost of drug development, 1975-2000

$900 Expenditure per new drug ($ millions, 2000)

$800 $700 $600 $500

$802

$400 $300 $200 $100

$318 $138

$0 1975

1987

2000

Business Insights

Source: PhRMA; DiMasi J et al. (2003)

Key patent expiries In addition to low productivity and rising R&D expenditures, the wave of innovation experienced in the early 1990s is now being followed by a related wave of patent expiries.

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Figure 1.3 shows the impact of US patent expiries on the top ten selling drugs in 2004. Procrit lost patent protection in 2004, with Prevacid and Nexium losing patent protection in 2005. Second highest selling drug in 2004, Zocor, will lose patent protection in 2006 with Norvasc losing patent protection in 2007. Effexor and Seretide/Advair both lose patent protection in 2008. Leading selling drug 2004, Lipitor, loses patent protection in 2010 with Plavix and Zyprexa losing patent protection in 2011. However, it should be noted that the US patent life for Plavix is currently being challenged by generics companies and patent protection might be lost as early as 2005.

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Figure 1.3: US patent expiries for top ten selling drugs, 2004

2004 global sales ($bn)

60

Effexor

50

Prevacid

40

Procrit Seretide/Advair

30

Norvasc

20

Zyprexa

10

Nexium Plavix 2011

2010

2009

2008

2007

2006

2005

2004 Sales

0

Zocor Lipitor

On-patent drugs (2004 sales) Business Insights

Source: IMS; FDA Orange Book

The pharmaceutical industry will experience a significant reduction in the revenues associated with these blockbuster products as generic competition captures market share. As a result, given that R&D productivity is at a ten-year low and the cost of developing new drugs at an all time high, the pharmaceutical industry faces considerable hurdles with respect to maintaining revenue and earnings growth in the future.

In addition to increasing productivity levels while maintaining efficiency of R&D expenditure, pharmaceutical companies must also ensure that they maximize the return on investment for those products that reach the market. However, according to PhRMA, only three of every 10 marketed prescription drugs produce revenues that match or exceed average R&D costs.

27

Healthcare cost containment At the same time as the pharmaceutical industry faces pressure to maintain revenue and earnings growth, healthcare providers face cost containment pressures of their own. Over the past decade, there has been significant growth in global healthcare expenditure, with healthcare representing a growing share of gross domestic product (GDP) in developed nations. In June 2004, the Organization for Economic Cooperation and Development (OECD) published data demonstrating that the annual increase in per capita spending on healthcare across OECD countries has outstripped overall economic growth per capita by approximately 70% between 1997 and 2002. In the US, per capita healthcare spend grow at a rate 2.3 times greater than that of growth in GDP over the same period.

Table 1.3 and Figure 1.4 show the trends in healthcare spending as a proportion of GDP between 1970 and 2002. Throughout this period, the US spent the highest share of GDP on healthcare, with expenditure increasing from 11.9% of GDP in 1990 to 14.6% in 2000. Additionally, the US spends more on healthcare per capita than any other country. Table 1.3: Trends in healthcare spending as a proportion of GDP between 1970 and 2002

France Germany Italy Japan Spain UK US OECD average

1970

1980

1990

1998

2000

2002

5.8 6.3 5.2 4.6 3.7 4.5 7.1

7.4 8.8 7.0 6.5 5.6 5.7 8.9

8.6 8.7 8.0 5.9 6.6 6.0 11.9

9.3 10.6 7.7 7.1 7.6 6.8 12.9

9.5 10.6 8.1 7.8 7.7 7.3 13.0

9.7 10.9 8.5 7.8 7.6 7.7 14.6

-

-

7.2

8.0

8.0

8.5

Business Insights

Source: OECD Health Data 2004

28

Figure 1.4: Trends in healthcare spending as a proportion of GDP between 1998 and 2002

16

Healthcare spend as proportion of GDP (%)

15 14 US

13

Germany 12

France Italy

11

Japan UK

10

Spain 9

OECD average

8 7 6 1998

2000

2002

Business Insights

Source: OECD Health Data 2004

The growth in health expenditure was, in part, a deliberate policy in some countries, such as the UK and Canada, which realized that cost containment during the mid-1990s had strained their healthcare systems. All OECD governments are under continuous pressure to reconcile economic and health concerns, with public purse funds contributing the bulk of health spending in most countries.

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Cost-containment initiatives In the light of increasing budgetary pressure, many countries are seeking to restrict growth in healthcare spending and are implementing a range of cost-containment initiatives. Three main types of cost-containment policies have been employed: regulating prices, input resources and healthcare service volumes; capping health spending; shifting costs to the private sector.

Cost containment in pharmaceutical expenditure Advances in medical technologies, population ageing and rising public expectations have been responsible for significant health spending growth, which was particularly notable in the area of pharmaceuticals. Between 1992 and 2002, spending on pharmaceuticals grew by an average of 1.3 times the rate of total health expenditure growth. Pharmaceutical expenditure accounted for between 9% and 37% of total health spending in OECD countries in 2002. Figure 1.5 shows the share of healthcare expenditure generated by pharmaceutical expenditure in 2002 across the main markets. Figure 1.5: Pharmaceutical expenditure as a share of total healthcare expenditure in 2002 22.3%

Italy

21.5%

Spain

20.8%

France

18.8%

Japan 14.5%

Germany

12.8%

US

17.2%

Average

Business Insights

Source: OECD Health Data 2004

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The key factors underlining pharmaceutical expenditure growth include: the ageing population; the emergence of “life-style” drugs; a shift to newer and more expensive drugs; an increase in therapeutic coverage (i.e. new drugs for diseases that previously could not be treated).

Many governments are using the systems employed to price and reimburse pharmaceuticals as a core component of their strategy to reduce healthcare expenditure. This has resulted in fundamental shifts in the way in which pricing and reimbursement decisions are made.

Increased budgetary pressures due to rising healthcare costs coupled with limited resources has, over the past decade, resulted in healthcare decision-makers moving towards cost management and quality assurance strategies for healthcare provision – healthcare decision-makers are striving to find the most efficient and effective combinations of medical care.

This approach to healthcare provision has required a shift towards the inclusion of economic considerations in healthcare decision-making in general, and in particular, with respect to pharmaceuticals. As a consequence, the degree of medical need and safety and efficacy are no longer the only key attributes of a pharmaceutical product with respect to reimbursement decision-making. Economic considerations are now major influencing factors.

While governments are being forced to adopt such an approach due to budgetary pressures, providers of private healthcare coverage are also placing increased emphasis on economic evaluations as they strive to increase efficiency and improve their competitiveness.

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Key issues The key issues involved with the optimization of pharmaceutical pricing begin with gaining an understanding of the explicit aims of price optimization. The key levers of cost containment set the current price optimization climate, which involves a proliferation of reimbursement regulations and the use of reference pricing systems. Price optimization is also significantly affected by a number of related disciplines, including the application of pharmacoeconomic evaluations, the impact of parallel trade and reimportation and the pricing effects of generic substitution.

Price optimization Strategic pricing in the pharmaceutical industry is a critical mechanism through which companies attempt to maximize profitability. However, obtaining high prices is increasingly difficult as pharmaceutical companies do not operate in a free market, being subject to various country specific legislations and regulators. When pharmaceutical companies have little or no restriction on price, which is true only in the US, they can maximize profits by pricing pharmaceuticals like any other product, subject to price-volume forecasts. Outside of the Medicare and Medicaid programmes the US government does not fund a national health insurance scheme, since it does not control pharmaceutical prices, the US has the highest drug prescription prices of the developed world and generates more than 60% of the average major pharmaceutical company profits.

National governments outside of the US have put in place legislative and regulatory requirements to restrain healthcare expenditure. Examples include the UK’s profit control mechanisms, Germany’s budgetary ceiling for general practitioners and reference price system, and France’s price cuts and rebates to control the costs of health care. These pricing and reimbursement regulations distort price optimization, where pricing decisions are often simplified down to the pharmaceutical company’s negotiations of the highest price with various reimbursement bodies.

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In the context of regulated markets, pharmaceutical pricing primarily involves supporting a claim to gain the highest reimbursement price. High prices require substantive data showing that a product is safe, efficacious and that it provides a relative therapeutic improvement on available treatments. In some markets additional data showing a drugs pharmacoeconomic benefit can also help support a high price. Notable exemptions from this rule are “lifestyle drugs” designed to treat conditions such as sexual dysfunction, baldness and obesity. These drugs are considered not to warrant a high reimbursement price and are instead launched outside of reimbursement in order to achieve optimal returns.

The ultimate aims of pharmaceutical pricing efforts are to generate sufficient returns in order to fund continued R&D efforts and launch and market new products. Innovation involves significant investment and risk and therefore warrants a high level of reward. However, where purchasing power is centralized by large reimbursement bodies, including HMOs and national health systems, a significant share of the power enjoyed by pharmaceutical manufacturers to set prices is ceded to the buyer. In light of continued cost containment pressures, pharmaceutical manufacturers must prepare to defend their claims for high reimbursement prices ever more vociferously in the future.

Reimbursement regulations The reimbursement framework for pharmaceuticals is primarily set by individual national regulations. There are several tools used by governments, to varying degrees, to regulate prescribing and reimbursement: reference pricing systems set pricing levels using a cohort of prices taken from similar drugs or from the same drug across different national markets; reimbursement groups determine proportional price levels up to which products are reimbursed. For example, products for chronic and acute serious diseases are often reimbursed to 100%, while non-life-threatening diseases might only be reimbursed to a lower proportion of the actual price;

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patient co-payment levels determine the relative contributions of patients and reimburser; pharmaceutical spending budgets are used to force physicians to keep the cost of their annual prescriptions below a set ceiling.

The free pricing of pharmaceutical products is considered to be an effective lever for encouraging innovation and the overall development of the pharmaceutical industry. The US has the closest system to a free market, where the government does not directly control prices. However the prices of drugs are indirectly controlled by large agencies such as the Veteran’s Administration, Medicaid retailers, chain pharmacies, and managed care providers. Other countries have free pricing for parts of their market. An example is Germany that freely prices patented products, with the government directly influencing off-patent and generic prices through a reference pricing system.

Profit control measures limit prices indirectly by arbitrarily capping the profits made by pharmaceutical companies, based on the capital invested into research, development, and manufacturing. The most prominent example of profit control measures is the Pharmaceutical Price Regulation Scheme in the UK. While this scheme is voluntary, companies comply because the agreement bars non-compliant manufacturers from operating in the UK.

The general agreement is negotiated between the Department of Health and the Association of the British Pharmaceutical Industry, with individual company details negotiated directly between the Department of Health and the company concerned. The agreement operates at the level of a company’s total business with the NHS, rather than in relation to individual products. Companies within the Scheme have a profit cap, measured as a return on average historic capital employed. This means that building, plant, land and other relevant items are valued at the time they were purchased as opposed to current prices. If excessive profits are not reached, pharmaceutical companies can increase their prices. Alternatively, if profits exceed target profits, then

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these profits must be returned to the government. As a result, the PPRS sets a ceiling on companies’ profits, but does not guarantee them.

Direct price controls describe a situation whereby the government directly influences pharmaceutical prices. Direct price controls are country specific, and often take into consideration the production costs of the product, including the costs of local R&D and promotion. Governments can then determine an appropriate price through intense negotiations, and potentially comparing the prices set in other benchmark countries. Reference pricing is a direct price control tool currently used in a number of markets to price drugs.

A further way to control pharmaceutical expenditure is to introduce incremental price cuts on established reimbursement rates. Price cuts reduce the amount that the government will reimburse over a certain time period. This method is used widely across many European markets, including France and Italy. Japan also implements a wide-ranging round of price cuts every two years as a way of reducing its pharmaceutical expenditures.

Price freezing sets the nominal price of a product and does not allow the price to increase due to external factors, such as inflation and exchange rates. Price freezing puts a direct control over prices for a set amount of time and has been used when pharmaceutical prices and expenditure have been undergoing periods of substantial growth. Most recently, price freezes have been implemented in the UK and Spain.

Negative lists contain the names of pharmaceutical products that do not receive reimbursement. This type of pricing control has been used in a number of European countries since the 1980s and has been periodically updated and extended in those countries. Products are added to a negative list where there are better, more effective drugs available or where the price is set at an excessively high level. European countries making use of negative lists include Germany, Spain and the UK.

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Positive lists include products that receive some level of reimbursement. Any products that are not on the positive list do not receive reimbursement from healthcare providers, and therefore the positive list is a stronger form of control than the negative list. Positive lists can be found in Belgium, Denmark, France, Greece, Italy, Portugal, Spain, and Germany. In the US, there is no government organized positive list, but some of the most powerful pharmaceutical buyers, such as the Health Maintenance Organizations (HMOs), operate their own versions of positive lists via formularies.

Delisting is closely linked to negative lists and occurs when a product is taken off a positive reimbursement list and put on a negative list. This usually occurs when products show limited clinical benefit compared with comparator drug options.

A pharmaceutical expenditure ceiling describes a system whereby an overall cap is placed on pharmaceutical expenditure within a country’s budget. This system is used to contain cost, but is very difficult to implement and manage, with budget overspending often having no direct consequences for the authorities. In the countries where expenditure ceilings are in operation, including Italy and Spain, budgets have been breached several times.

In the UK and Germany, primary care physicians take on the role of gatekeepers for healthcare provision. Governments set a fixed budget for the treatment of a physician’s patients and give them the responsibility to contain costs. The system gives an incentive to physicians to use generics instead of higher-priced brand names, which leads to decreases in the volume of branded products. Promoting the use of generics ahead of more expensive branded products is an easy way for governments to control the cost of treatment without significantly affecting the quality of treatment.

Pharmacoeconomics has become known as the fourth hurdle to gaining reimbursement in a healthcare system. After assessing a product’s safety, quality and efficacy in markets such as Australia, the Canadian province of Ontario and the Netherlands, there is a mandatory requirement by reimbursement authorities to present evidence of a

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product’s cost effectiveness. Marginal benefits from the drug are compared to the marginal costs to determine if the drug is really worth paying for. Regulatory authorities and governments that use pharmacoeconomics have adopted one of two approaches. The first is a mandatory pharmacoeconomic assessment before a new product’s reimbursement status or price is allocated, and the second is to use a pharmacoeconomic assessment after a product’s launch to provide guidelines for its use. Other countries, including Finland, Denmark, and Portugal, also have an explicit requirement for cost-effective data, while France also has an implicit requirement for cost-effectiveness. France prices products with reference to how much more a new product is worth compared to other products in the market. The UK and Italy have recently followed suit, and use pharmacoeconomic evaluations to influence physician prescribing, pricing, and reimbursement of the drug.

Of all countries operating government-led reimbursement systems, Japan and Germany have the most generous reimbursement systems. In these countries, all products are generally covered by the statutory health insurances and reimbursed to 100%, except for relatively low patient co-payment per prescription item. The UK reimbursement system works in a similar way, but the criteria for placing products on the positive list are stricter than in Japan and Germany. In France and Italy, patients with chronic diseases receive 100% reimbursement on their prescriptions, while other conditions have partial or no reimbursement. In Spain, outpatient prescriptions are never fully reimbursed, except for those for retired people.

Reference pricing Reference pricing, both internal and external, is being used more and more widely in markets outside the US. Internal reference pricing of products, based on the active ingredient, is becoming increasingly widespread, often in combination with the promotion of generic substitution by pharmacists. Internal reference pricing represents an attempt by governments to bring down the price of a branded product as soon as it loses patent protection, as opposed to waiting for market forces to take their effect. The most important implication for pharmaceutical companies is that their pricing options

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following patent expiry of a key product will become more limited. Previously, branded pharmaceutical companies could attempt to compete with generic versions of their drugs through the strength of their brand, often maintaining a higher price for their original product. However, under a reference pricing system this is no longer possible.

Drug prices are no longer priced independently in Europe and are becoming increasingly controlled elsewhere. Price differentials between different countries are becoming more transparent as companies increasingly operate globally, leading governments to compare prices internally and externally. As countries continue to reference each other’s prices, drug prices will continue to converge, both in Europe and in the rest of the world.

Reference pricing has become a more transparent task since the introduction of the Euro and the creation of the European Agency for the Evaluation of Medicinal Products (EMEA). Countries that have implemented a reference price system have seen prices begin to converge to an average European price. However, this does not imply that there will be a single market for drugs in the European Union (EU) in the near future. Although the European Commission has tried to implement policies to obtain a single European market, it has also stated that health policy, including pharmaceutical policy, is a national responsibility. With varying price controls, price differentials will continue to occur, though differences will be decline as a result of reference pricing. Going forward, price differentials will be most noticeable in Europe between countries that have adopted the Euro and those that have not and between those that reference price and those that do not.

Since the EC has left individual governments with the responsibility to price drugs, governments will continue to try to find a balance between cost savings and continued investment into research and development. This has caused a dichotomy in the European market, with some markets encouraging investment in R&D and bearing higher prices, such as the UK and Germany, while other markets stress cost savings through low prices, such as France and Italy. 38

Reference pricing affects products in different ways depending on how much the market is affected by reference pricing. When drugs are priced with reference to similar drugs in the same market, prices tend to converge to the lower end or middle of the price corridor. When the price of a product is compared externally with the price of the same product in other countries, the price of the drug tends to harmonize across the relevant markets. However, products sold in countries with strict price control are generally still below the average EU price.

Pharmacoeconomic evaluations Over the last decade, cost containment pressures in the healthcare industry have led to the emergence of pharmacoeconomic and health economic evaluations, both of which aim to determine the optimal allocation of resources within a restricted budget. For pharmaceutical companies, the rise of pharmacoeconomics and closely related disciplines, such as health economics and outcomes research, has generated a need for new processes and areas of expertise. However, pharmacoeconomic procedures are not established to the same extent in all markets, since requirements and regulations differ widely, making a comprehensive strategic approach difficult for pharmaceutical companies.

There are several formal methods employed for analyzing the costs and benefits of a medical intervention. The main approaches include: cost-benefit analysis; cost-effectiveness analysis; cost-utility analysis; cost-minimization analysis.

In addition to the chosen type of analysis, two other parameters are crucial for any pharmacoeconomic study:

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the perspective (society or individual): the costs to be measured (direct or indirect).

A cost-benefit analysis (CBA) compares the monetary value of alternative uses of resources with their outcomes. In a CBA, costs and benefits (or outcomes) are both valued in monetary units. Results are typically expressed as a cost-benefit ratio or a net benefit amount.

A cost-effectiveness analysis (CEA) compares the cost of alternative therapies in ‘natural’ units or health outcomes, such as life-years gained, symptom-free days, number of events avoided or number of cures. In this context, it is important to note the difference between cost-effective and cost-saving measures. A cost-saving therapy is less expensive than a competing alternative, whereas a cost-effective treatment may be more expensive, though more effective, than alternative therapies.

A cost-utility analysis (CUA) compares the cost of different treatments in terms of patient outcomes. It is similar to a CEA, but the outcomes are adjusted by a quality of life (QoL) factor based on, for example, patient preference or quality of healthcare outcome. Generally, outcomes are expressed as a patient-weighted utility measure, most often a quality adjusted life year (QALY). A QALY is a quantification of the physical, social and emotional aspects of a patient’s well being that are relevant and important to the individual. CUA and CEA are the most commonly used types of pharmacoeconomic study, since the underlying models can be refined and customized as required.

When the outcomes of two or more treatment alternatives have been demonstrated to be equal in terms of safety and efficacy, a cost-minimization analysis (CMA) is often employed. This method is used to determine the least expensive option, assuming that the available options have equal outcomes. In CMA, costs are measured in monetary units, whilst outcomes are considered equal and are, therefore, not compared.

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The major driver of pharmacoeconomics lies in the increasingly cost-conscious healthcare environment. This has led to a need for more effective and consistent resource allocation within a limited healthcare budget. Resistors to pharmacoeconomic approaches are often related to negative perceptions of the methodologies on which the studies are based, as well as difficulties arising from integrating such studies into R&D and drug approval processes. Although the cost of pharmacoeconomic studies is relatively low compared to pharmaceutical R&D and marketing budgets, it is sometimes mentioned as a potential resistor. Figure 1.6: Key drivers and resistors of pharmacoeconomics

Drivers Increasing healthcare expenditure Support pricing and reimbu rsement negotiations Improve focus in R&D and sales and market ing strategies

Resistors Negative perceptions/experiences related to application of different methodologies Difficulty of early economic drug assessment Financial cost of studies

Business Insights

Source: Delphi Pharma

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Parallel imports Parallel importing does not yet play a significant role in the two largest pharmaceutical markets, Japan and the US. Although the US operates a general principle of complete international exhaustion of intellectual property rights, since 1988 it has been illegal for pharmaceutical products to be imported into the country because of the perceived fear of low quality or counterfeit products entering the market. Japan does not subscribe to the principle of international exhaustion, with companies able to prevent their products from being imported from other countries using their trademark rights.

Parallel importing has a particularly significant effect upon those pharmaceutical markets found within the European Union (EU). Moreover, it is illegal to erect barriers to trade between the member states of the EU, which operates as a single market. With individual countries operating different degrees of control over the prices of pharmaceutical products, price disparities remain strong despite the free trade within the area. As a result, parallel importing has become a significant factor in the development of the European pharmaceutical market, affecting company sales and related pricing strategies.

Parallel importing in Europe had its genesis in the early 1980s when pharmacists in high priced countries, such as Germany and the UK, realized that they could increase their profit margins by buying pharmaceutical products outside of their domestic markets. Since then it has gradually grown into an industry sector that has a significant impact on the pharmaceutical market within low price export markets, such as Spain, and high cost import markets, such as Germany and the UK.

Following the creation of the European free market, a series of court cases brought by pharmaceutical companies against importers during the 1990s has clarified the extent to which manufacturers can prevent parallel trade impacting their own sales. To date, the importers have won every major case and this has stimulated further development of the sector.

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The key factor in a parallel trader’s decision to import a product is the difference in price between the source and import markets. It is this single factor that most clearly influences the amount of profit that can be achieved by importing a drug. Although most parallel traders are unwilling to specify the critical range for price differentials, a margin of less than 15% is considered highly unlikely to be profitable.

In principle, it is unimportant whether an imported drug is a premium priced product carrying a high margin for the manufacturer or a low cost, low margin drug, given that an importer’s margin is generated entirely by the price differential. However, given the impact of reference pricing on pricing in some European countries, a drug that is premium priced in one or more markets is more likely to carry a high cost differential. As a result, premium priced, high margin products can generate a high level of parallel importing.

Since margins can be relatively low for drug importation, drugs for diseases with large patient populations are preferred. In addition, chronic diseases with consistent demand for drug therapy are also highly attractive. For example, an anti-hypertensive is more likely to be affected by parallel importing than an antibacterial, even though they may have the same market size.

On top of the drug purchase price, the major costs incurred by parallel importers are transport and, potentially, repackaging. With pharmaceuticals in tablet form requiring less specialist transport, orally formulated drugs are considered more attractive to parallel importers. Oral tablets are relatively insensitive to changes in temperature and light, so non-specialist transport can be used. Moreover, more units of orally formulated drugs can be transported in a specified volume than can units of injectable drugs. Less packing is required for tablets than for vials, reducing the transport costs of oral compared to injectable products.

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As the parallel importation market sector matures, consolidation is inevitable. An increase in the average size of parallel importing companies is likely to result in changes to a number of key market dynamics: larger companies will be able to leverage economies of scale to reduce the intracountry price differential needed to make importing a product profitable, thereby exposing a greater number of products to the threat of parallel importing; companies with experience of buying in a range of markets will be able to identify the cheapest version of a product within those markets, increasing the probability that a particular drug will experience parallel trade; companies with a greater number of potential export sources will be able to offer a more consistent supply to wholesalers and pharmacies and, in turn, establish more effective long term relationships with buyers; larger parallel traders will be in a stronger position to negotiate discounts in source markets, improving their margins further and widening the range of products vulnerable to parallel importing; operating throughout Europe will give parallel traders more flexibility to respond to new product launches and changes in pricing, resulting in imports impacting more quickly on a manufacturer’s product revenues in the future.

Generic substitution Generic substitution continues to have a significant impact on the pricing of pharmaceutical products both pre- and post-patent expiry. The ability to protect the original product from generic substitution is largely be determined by the size and market presence of the product’s marketer. It is clear that branded pharmaceutical products cannot compete effectively on price with generic products and, as a result, the growth of the generics industry will continue to have a significant influence on pricing throughout the product lifecycle.

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With pricing regulations varying considerably from country to country, the effects of a growing generics industry on pricing will be diverse. In the US’s comparatively free market prices and pricing strategies are relatively flexible, while in more heavily regulated European markets the potential to change prices and pricing strategies is more limited.

For major pharmaceutical companies a large part of the battle against the destructive effects of generic substitution is over once generics reach the market. As a result, major pharmaceutical companies’ pricing strategies focus on maximizing pre-patent expiry revenues and then rely upon a strong brand presence in order to retain as much market share as possible following patent expiry.

The loss of patent protection for gold standard products in major disease markets, such as the antidepressant Prozac (fluoxetine) and the anti-ulcerant Losec (omeprazole), commonly has a major effect on the pricing of other patent protected products in the same class. The key factors in determining the size of the pricing effect include the level of generic competition, physician awareness of generic equivalents and the therapeutic profile of the competing proprietary products. If a competing patented product can be reformulated to show therapeutic advantages over the generic version, then its market share is likely to have some protection and pricing strategies will not change significantly. However, if there is little difference between the generic gold standard and the competing patented product, the pharmaceutical company will need to reduce the price of its drug in an attempt to maintain volume share.

The treatment regime associated with a gold standard generic also determines the degree to which it will affect competing branded products. For chronic conditions, such as severe depression, where a product is likely to be prescribed for a period of several years, competition from similar generic products will be relatively slow because physicians are often unwilling to change a patient’s long-term treatment on the basis of cost alone. However, patent protected drugs indicated for conditions where shorter periods of treatment are the norm, such as bacterial infections, will experience greater indirect competition from gold standard generics. In this situation, physicians are less 45

concerned with slight variations in a drug’s therapeutic profile and are more inclined to prescribe the most cost-effective therapy.

Hot topics Alongside the key pricing issues of cost-containment, pharmacoeconomics, parallel imports and generic substitution, a number of hot topics have also been widely debated over the last few years. These include US reimportation, Medicare reform, EU enlargement, price harmonization and pricing and reimbursement hurdles. Each topic will covered in more detail in later chapters of this report, but below is a summary of the key trends and implications.

US reimportation In 2003, US reimportation of prescription pharmaceuticals from Canada was estimated to be equivalent to US$1.1 billion, or 0.5% of total US pharmaceutical salesi. The number of internet pharmacies has been increasing significantly, up from 99 in March 2003 to 214 in January 2004. The growth in US reimportation has followed a number of local government led initiatives, including local government sponsored cross-border programmes in Alabama, Massachusetts and Minnesota.

Much of the resistance to growth in cross-border sales has been the result of several interventions from major pharma companies: in January 2003, GlaxoSmithKline limited its supply to 29 internet pharmacies and stopped dealing with wholesalers who sell to the online stores;

i

Pricing and Reimbursement. Review 2003. Cambridge Pharma Consultancy. IMS Health

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in April 2003, AstraZeneca implemented a quota system limiting its supplies to wholesalers; in August 2003, Pfizer informed 50 internet pharmacies that they must now deal directly with Pfizer for future supplies; in October 2003, Eli Lilly limited its supplies to wholesalers and put all pharmacies on notice; in January 2004, Pfizer followed Lilly’s lead and limited its supplies to wholesalers and put all pharmacies on notice.

The issue of cross-border reimportation in the US is a complex issue. There is pressure on regulators to act and make a choice between legalizing imports to some extent or a clear statement that imports are not legal and that action would be taken against all parties involved. Any action is more likely to be against the local government facilitators of parallel imports than with individual consumers.

Medicare Drug Benefit The outcomes of Medicare reform in the US are not yet clear, but may include shaping usage patterns for drugs servicing seniors and other spillover effects on non-Medicare populations. It seems clear that health plans will shift towards greater usage of generics, offering limited access to non-preferred brands. As managed care organizations (MCOs) adjust to offer integrated Medicare Advantage plans there will be shift from a rebate-driven revenue model towards a risk-based cost control model. At the same time, federally ‘stamped’ Medicare benefits will set new standard levels for commercial benefits.

In the new Medicare environment, pharmaceutical companies will need to focus earlier on pricing, positioning and access issues. Head-to-head superiority trials will add costs and raise ethical concerns regarding access restrictions. Employers will be targeted with pharmacoeconomic and rebate economic evaluations, redefining product values.

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More restrictive labeling will be used as a means to gain exclusive access to narrow populations.

EU enlargement Following accession of 10 new pharmaceutical markets into the EU economic area in 2003, the pharmaceutical industry has been concerned with the increased threat from parallel trade and lower prices through reference pricing. However, pharmaceutical companies have employed a strategy of keeping prices high in accession markets, often at the expense of volume and reimbursement, in order to limit exposure to increased parallel trade and lower reference prices. This is certainly true for the leading branded products, which are priced at levels similar to the average price found in Western Europe.

While the short-term threat from low prices in accession markets has been largely abated, a drive towards providing greater access to pharmaceutical products in the new markets and continued cost-containment pressures may result in a greater threat to EU pharmaceutical prices in the future. Poland has adopted volume restrictions, therapeutic referencing and substitution measures already used in France and Germany. In Hungary, price negotiations and international reference pricing approaches employed in France and Spain have been implemented.

Future trends are likely to see accession market volumes grow and prices decline. As is the case across the EU, wholesaler margins are under pressure in accession markets and parallel trade provides an effective opportunity for growth. With some level of parallel trade already occurring in the new markets, a trend towards greater volumes of imports in the future seems assured in the medium to long term.

Price harmonization Very few products achieve similar price levels in the US and Europe. Most drugs are priced significantly lower in Europe as a result of the lower price of existing benchmark products in Europe and limited premium pricing. AstraZeneca’s Crestor, 48

Lilly’s Cialis, Pfizer’s Bextra and Merck’s Emend all have average European prices more than 60% below their US price. There is some limited narrowing in the spread of European prices around the average, but this is mainly a result of harmonization amongst countries outside of the five major European markets.

Although much has been said about moves towards global prices across the US and Europe, there is little evidence of this in practice, with pricing in Europe still constrained by price sensitive payers and cost-containing reimbursement systems. However, as pharmaceutical companies continue to exploit differences between pricing systems with differential pricing, they must be ready to play an active part in the debate surrounding access to medicines and disproportionate differences in the cost of treatment across countries.

Pricing and reimbursement hurdles The speed of approval and reimbursement across markets has not improved significantly over the last 5 years. Products with the fastest launch programmes in Europe tend to be those launched outside of reimbursement, such as Lilly’s Cialis and Bayer/GlaxoSmithKline’s Levitra. In the US, most products are only available to 50% of the insured population one year after launch. This is roughly in line with the speed of European launch programmes.

It is clear that the different pricing and reimbursement hurdles found across European and markets and amongst different payers in the US have a significant impact on speed to market for new products.

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CHAPTER 2

Pricing and reimbursement in North America

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Chapter 2

Pricing and reimbursement in North America

Summary Unlike the other major pharmaceutical markets, the US does not have a government-sponsored health insurance plan that ensures access to healthcare for the entire population. As a result, the national government does not directly influence the prices of pharmaceuticals, but allows drug prices to be determined by the free market. Drug prices are influenced by competition between rival products, the market size of the drug, the number of substitute products, and the costs of R&D of new products. Recent development in the US include the coming into force of the 2003 Medicare Prescription Drug Act, a Medicaid budget crisis and state-level pricing initiatives in Maine, Florida and elsewhere. These developments occurred in the context of a market with increasing high relative pharmaceutical prices. Under the best case pricing scenario for pharmaceutical companies in the US, the 2003 Medicare Prescription Drug Act would lead to wider access, improved compliance and increased utilization. Prices for effective drugs would remain high while volumes would increase in line with the widened coverage. A best case pricing scenario would also involve a cut-back on state-level activity involving the negotiating of rebates for Medicaid. Rebate schemes would be limited to Maine and Florida and would not be extended further. Federal level and high court-level intervention would limit state-rebates. Finally, a best case scenario would involve re-enforced protection from Canadian reimportation. Legislative plans will be shelved and state-level importation programmes will be successfully challenged in the courts and limited though limitations in supply. Generic legislation will continue unchanged, but pharma companies will work harder to challenge generic entry and limit uptake through line extensions and reformulations.

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Introduction The pricing environment in the US and Canada is primarily determined by its healthcare system and pricing regulations. However, other issues such as pharmacoeconomics, parallel importing and generic substitution also impact on pricing decisions in the pharmaceutical market. Following a number of recent developments in the US pricing environment, future drivers and resistors for pharmaceutical pricing are unclear. However, an understanding of the best, worst and most likely future pricing scenarios help to provide guidance as to how to manage those functions impacting on future pharmaceutical pricing and reimbursement decisions.

US pricing regulations Unlike the other major pharmaceutical markets, the US does not have a governmentsponsored health insurance plan that ensures access to healthcare for the entire population. As a result, the national government does not directly influence the prices of pharmaceuticals, but allows drug prices to be determined by the free market. Drug prices are influenced by competition between rival products, the market size of the drug, the number of substitute products, and the costs of R&D of new products.

Although the federal government does not directly regulate drug prices, they are influenced by other segments of the market. The US healthcare market is managed through a number of different schemes, including private health insurance, health maintenance organizations (HMOs), and the federal sponsored health insurance plans for the poor and the elderly. It is financed primarily by private health insurance, which charge different premiums to different segments of the population based on a range of health risk factors. A growing trend in the US is the use of HMOs. These organizations combine an insurance company and a medical team in order to give cost effective incentives to medical workers. The premiums paid to HMOs are generally based on a

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flat rate, taking the average risk of low and high risk individuals. However, low risk individuals often opt out of insurance coverage because they consider their risk to be lower than the costs of health insurance.

In addition to those individuals paying into private health insurance schemes and HMOs there is also a significant part of the US population that cannot afford health insurance. The federal government provides for the very old through Medicare and each state manages its own healthcare insurance, Medicaid, for the very poor. As a result, healthcare provision in the US is very diverse, and so is the coverage of prescription drugs. Prescription drugs are often priced differently for different individuals based on their level of health insurance coverage.

Hospital, institutional, and managed care customers usually pay well below the manufacturer’s list price as a result of heavy discounting and negotiations between the pharmaceutical companies and the organizations. The organizations are able to achieve high discounts principally through their significant purchasing power.

Drugs sold directly to wholesale distributors and pharmacy chains for individual physicians and patients are priced at the higher end of the price scale. Recently, drug prices have become a key political issue in the US, as the price differentials within the US and between the US and different countries have become increasingly highlighted in the public arena.

Medicare Medicare is a federal insurance scheme made available for people over the age of 65. In addition to this demographic group, in some circumstances people under the age of 65 with disabilities are also covered. The scheme currently covers approximately 40 million US citizens, corresponding to around 15% of the US population.

The Medicare scheme is divided into two separate parts. Part A provides basic cover for hospital care and certain follow-up costs, such as post-hospital nursing. Medicare 53

pays a certain amount of hospital costs for any period of illness, dependent on the chosen provider, such as hospital, psychiatric clinic, nursing facility.

Part B of the Medicare scheme covers basic medical outpatient costs, including physician’s fees, medical tests performed on an outpatient basis, medical equipment and supplies, such as glucose monitoring equipment and heart pacemakers, and outpatient hospital treatment. However, most notably Medicare has not historically covered prescription drugs given to outpatients. Many routine examinations are also not reimbursed, resulting in the reimbursement of only around 50% of all medical bills incurred by Medicare patients.

Medicare remained similar to its original form until 1997 when Part C, Medicare+Choice, a Medicare plus private managed care scheme, was added to control costs and offer expanded benefits, most notably, prescription drug coverage. To fill some of the gaps in Medicare’s insurance coverage, patients have the option to join Medigap, a private health insurance scheme that works in conjunction with Medicare. Approximately 60% of Medicare recipients also use Medigap to gain reimbursement for patient co-payments and services only covered by Medicare up to a given limit.

While 83% of Medicare enrollees take prescription drugs, only 62% of all beneficiaries have drug coverageii. These figures reveal that 21% of Medicare enrollees, or 8.4 million seniors, buy prescription drugs entirely out-of-pocket. In 2003, the average cost of prescriptions for beneficiaries was $2,322. Average out-of-pocket expenses for Medicare enrollees were $999 for prescription drugs, a significant 55% increase from $644 in 2000. This drain on personal financial resources, has demonstrated a significant impact on prescription drug utilization, and subsequently on health outcomes. On average, seniors without drug coverage have fewer prescription, than

ii

Kaiser Family Foundation, “Fact Sheet: Medicare and Prescription Drugs.” April 2003

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their covered counterparts, and of the drugs they are taking, compliance rates are low, particularly in treatments for chronic conditions, as patients try to extend the number of days each prescription lasts.

Medicaid Medicaid is a public health insurance program put in place in 1965 for individuals and families with low-income and also acts as additional insurance program for low-income elderly and disabled Medicare beneficiaries.

Medicaid is overseen at the federal level and is administered on a state-by-state basis. As such, benefits vary widely between states. Under federal guidelines, each state has autonomy over standards of eligibility, scope, type and amount of services, payment rates for services and overall program administration. However, changes made to state guidelines require federal approval. Therefore, in reality there are in excess of 50 Medicaid programs, with each state, the District of Columbia and other US territories operate their programs differently.

The flexibility built into the Medicaid system allows states to provide optional services. The provision of prescription drugs is one such service and currently 50 states and the District of Columbia have opted to include this benefit. Under federal requirements Medicaid covers all prescription drugs deemed to be medically necessary and there is no exclusion solely on the basis of cost. The maximum reimbursement for classes of drugs is set at the federal level.

The states and the federal government share responsibility for funding Medicaid with the federal government matching state spending. The federal matching rate varies by state and is determined by a formula based on income per capita in each state. The federal contribution varies from 50–77% with the US average close to 60%. Medicaid represents a significant proportion of federal and states’ spending.

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Drug companies also charge government organizations such as the Medicaid program and the Veterans Administration drugs on a negotiated discount basis. The Medicaid Drug Rebate Program, created by the Omnibus Budget Reconciliation Act (OBRA) of 1990, requires a drug manufacturer to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services for States. This agreement allows the drug manufacturer to receive federal funding for outpatient drugs dispensed to Medicaid patients. The drug rebate program is administered by Health Care Financing Administration’s (HCFA) Center for Medicaid and State Operations (CMSO). In 1992, this law was amended by the Veterans Health Care Act, which requires a drug manufacturer to enter into discount pricing agreements with the Department of Veterans Affairs in order to have its drugs covered by Medicaid.

Private healthcare Managed care is a cost containment system that has arisen in the US over the last three decades as a response to high growth in healthcare expenditure. Managed care organizations (MCOs) now cover upwards of 95% of employer-insured Americans. Managed care plans seek to manage the costs, access and quality of the healthcare services provided for their members. Health expenditures are controlled through the central management of a range of services for large numbers of enrolled patients. However, criticisms relating to the decreased quality of care caused by such programs are often leveled by patient groups and healthcare providers. As part of ongoing costcontainment efforts, MCOs restrict patients’ choices of primary care physicians and specialists and limit the number of reimbursed medical procedures.

Within the fragmented private healthcare insurance landscape, HMOs are the most common type of MCO. HMOs fix prices in advance of treatment, set up formulary lists of reimbursable drugs and collaborate with pharmacy benefit managers to offer the most cost-effective treatments available. For limited access to specialist services, HMOs often either contract with or directly employ physicians and other healthcare providers.

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According to the Pharmaceutical Care Management Association (PCMA), more than 80% of all prescriptions dispensed in the US annually are paid through a prescription benefit plan administered by a pharmacy benefit manager (PBM). PBMs offer employers and health insurer plans cost savings by organizing large networks combining the purchasing power of their participants. With 95% of all US retail pharmacies included in PBM networks, PBMs leverage their purchasing power to secure rebates from manufacturers and discounts from retail pharmacies. PBMs manage prescription benefit plans through contracting directly with health plans, HMOs, managed care groups, employers, insurance companies, unions, Medicare and Medicaid managed care plans, and government entities at the local, state and federal levels.

Recent developments in the US Recent development in the US include the coming into force of the 2003 Medicare Prescription Drug Act, a Medicaid budget crisis and state-level pricing initiatives in Maine, Florida and elsewhere. These developments occurred in the context of a market with increasing high relative pharmaceutical prices.

A study published by Boston University’s School of Public Health in 2004 showed that branded drug prices paid by Americans were around 81% higher, on average, than in Canada and seven other western countries in 2003. This price difference has risen from an average of 60% in 2000. The study examined the prices of 1,000 patented drugs.

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140% 120%

118%

108%

100%

87%

75%

80%

73%

63%

60%

58%

40% 20%

Sw it z er la nd

UK

an y G er m

Ca na da

Sw ed en

Fr an ce

ly

0%

Ita

US prices as a percentage increase of avergae prices

Figure 2.7: Average branded drug prices in selected countries compared with the US

Business Insights

Source: Boston University’s School of Public Health

The 2003 Medicare Prescription Drug Act Due to its shortcomings, the reform of the Medicare system has been on the political agenda for some time. The Clinton administration made a number of reform efforts during the 1990s and now, held to pre-election promises, the Bush administration is attempting to address the deficits of the scheme.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 creates affordable options for prescription drug coverage for the 15.2 million beneficiaries that lack coverage through two primary approaches: drug discount cards and Federal contribution to committee drug spending. Beginning in April 2004, the newly created prescription discount drug cards offers all Medicare enrollees an estimated 10–25% savings on their prescriptions for a $30 annual fee. The program also gives enrollees with incomes below 135% of the poverty line, who do not have other prescription drug coverage, a subsidy of $600 for their prescriptions. 58

In 2006, Medicare Part D becomes available. For $35 a month, the standard outpatient drug benefit will have a $250 annual deductible, and an individual contribution of 25% requirement between the deductible and an initial benefit cap of $2,250 in drug spending. For drug expenditures between $2,250 and $5,100 the individual will be responsible for 100% of payment, with no contribution from the government. However, once the individual incurs $3,600 in out-of-pocket costs ($5,100 in drug spending), catastrophic coverage takes effect, whereby the government pays 95% of costs and the individual makes up the remaining 5%. This coverage scheme, as applied to the current Medicare population, is depicted in Figure 2.8. Figure 2.8: Distribution of 2003 Medicare drug expenditure 100% 90% 80% 70%

$5,100+

11.2%

$2,250$5,100

25.1%

$1$2,249

53.4%

$0

10.2%

The top 36% of enrollees account for nearly 80% of drug expenditures

60%

42.4%

50% 40%

35.9%

30% 20% 10% 0%

21.7% Medicare enrollees (40 m illion)

Medicare drug expenditures ($95 billion) Business Insights

Source: Author’s research and analysis

Additional premium and cost-sharing subsidies will be provided to beneficiaries with incomes under 150% of the poverty level. People with income below 135% of poverty will have no co-payments above the catastrophic limit, while those between 135% and 150% will have a $2 to $5 co-pay.

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Expanded access… According to a recent study published by the Kaiser Family Foundation, 83% of the nearly 40 million seniors enrolled in Medicare (33.2 million) take prescription drugsiii. However, the Centers for Medicare and Medicaid Services reports that only 38% of these beneficiaries (15.2 million) have prescription drug coverage. This leaves 8.4 million enrollees who are taking prescription drugs but have no drug coverage and thereby pay entirely out-of-pocket. These personal costs clearly results in a lower rate of prescription utilization, as Medicare beneficiaries without drug coverage fill an average of seven fewer prescriptions per year than those with coverage (18 vs. 25 respectively)iv.

In 2003, Medicare enrollees with drug coverage spent approximately $2,560 annually on prescriptions, while their counterparts without drug coverage spent $1,356, resulting in a difference in total drug spending between those with and those without drug coverage of $1,204. Thus, those with coverage spend 47% more than those without.

Given that the uncovered drug-taking group (8.4 million) will benefit from Medicare Part D, we see an increase in spending of $10.3 billion per year from this group alone as they use this coverage.

Improved drug compliance… Due to rising prescription drug costs, patients with chronic medical conditions that can be successfully controlled with medications often go without medications; one-third of seniors with serious health problems who lacked drug coverage reportedly skipped

iii

Kaiser Family Foundation, “Fact Sheet: Medicare and Prescription Drugs: Fact Sheet.” April 2003

iv

Briesacher B, Stuart B, Shea D. “Drug Coverage for Medicare Beneficiaries: Why Protection May Be

in Jeopardy.” Issue Brief (Commonwealth Fund). Jan 2002;(505):1–8

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doses of their prescriptions to make their prescriptions last longerv. The inability of seniors to afford their necessary medications not only puts the seniors at serious health risk, but also creates an increase in acute medical crises, placing greater financial burden on the health system. In financial terms, the National Pharmaceutical Council estimates that noncompliance in the US costs more than $100 billion a year in additional costs due to increased hospital admissions, nursing home admissions, lost productivity and premature death.

A study conducted in eight states showed that nearly one quarter of all seniors did not fill a prescription or skipped doses of their medications. Among those seniors who lacked drug coverage, more than a third (35%) did at least one of these things. The study reported that compliance rates for patients with diabetes, heart disease and hypertension improved by 50% when a beneficiary had prescription coveragevi.

Higher utilization… Sections 611–613 in the Medicare drug coverage legislation establish new services offered to beneficiaries that are expected to drive utilization rates. Effective January 1, 2005, within six months of a beneficiary’s initial coverage begins under Part B, Medicare will cover an initial preventative physical examination. CMS will be expanding chronic care and disease management programs for chronically ill, high-cost beneficiaries. Beginning January 1, 2006 CMS will require Medicare Advantage organizations to have ongoing quality improvement programs for chronic illness. In addition, Medicare will reimburse for cardiovascular blood screening tests, as well as diagnostic screening tests for purposes of early detection of diabetes.

v

Safran, D. “Seniors and Prescription Drugs: Findings from a 2001 Survey of Seniors in Eight States”

August 31,2002

vi

The Henry J. Kaiser Family Foundation, The Commonwealth Fund, Tufts-New England Medical

Center. “Seniors and Prescription Drugs: Findings from a 2001 Survey in Eight States.” July 2002 61

It is anticipated that the inclusion of preventative screening will increase the number of diagnoses made, and thereby result in an increase in the number of scripts written for these screened conditions.

Price comparison tool… At the end of 2004, Health and Human Services (HHS) added a cost comparison facility to the Medicare discount drug website in order to allow beneficiaries to compare the cost of similar drugs used to treat common illnesses. The ‘Lower Cost Rx Comparison Tool’ allows users to compare the prices of similar drugs used to treat common illnesses. It currently covers 52 medicines, accounting for around a quarter of total Medicare drug expenditure.

The government hopes the new tool will help facilitate discussion between patients and physicians regarding whether or not a less expensive but similar drug could be used. Physicians and pharmacists update the medical content of the Medicare site on a monthly basis, and drug prices are updated weekly.

Medicare drug benefit formularies… In early 2005, the United States Pharmacopeia (USP) submitted final model guidelines for health plans designing formularies for the new Medicare prescription drug benefit. While health plans will not be legally required to follow the guidelines, it is hoped the will encourage consistency and facilitate the implementation of the new drug benefit.

Draft guidelines on how the Centers for Medicare and Medicaid Services (CMS) will review the new Medicare prescription drug benefit plans have been released for public comment. Reviews will be undertaken to ensure that plans provide access to medically necessary treatment to all beneficiaries in a non-discriminatory fashion and encourage common approaches to drug management. The reviews focus on three key areas: Pharmacy Therapeutics committees will be required to use best practices to develop plan formularies;

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formulary lists will be reviewed to ensure that best practices are followed – formulary classification systems and the drugs listed on the formulary will be examined; benefit management tools will be compared with tools used in existing plans in order to ensure they are being applied in a non-discriminatory fashion.

The US government also named the regions for the prescription drug plans and the new Medicare Preferred Provider Organizations (PPO), which will be established in 2006 as part of the Medicare reforms. 34 regions have been created for the prescription drug plans and 26 designated for the PPOs. The regions were determined based on the input from beneficiary and consumer groups, health plans and organizations with experience of providing prescription drug benefits.

Medicaid budget crisis The US is currently experiencing a budget crisis at the state level. Having enjoyed the economic expansion and fiscal windfalls from the boom years of 1995–2001, a sharp fall in tax rates coupled with a decline in manufacturing, poor stock market conditions and a slide into recession has left many states facing significant budget gaps. Following successive periods of budget shortfalls and with states unable to borrow and in most cases unwilling to raise taxes, cost reduction is the primary tool for states to balance their budgets.

On average, Medicaid spending represents 20% of total state spending and has recently been growing rapidly at a rate in excess of 10% a year, as shown in Figure 2.9. As the second largest contributor to budgetary spending, Medicaid is seen as a key target for fiscal cost reduction. Consequently, states are cutting back on healthcare spending with most states employing cost-containment strategies with respect to Medicaid spending.

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Figure 2.9: Average annual growth rates of total Medicaid spending, 19952002

14%

12.8%

12% 10%

9.0%

8% 5.4%

6% 4%

3.2%

2% 0% 1995-97

1997-99

1999-01

Source: Kaiser Commission on Medicaid and the Uninsured

2002

Business Insights

Moreover, an increase in prescription drug costs is cited by most states as a leading contributing factor to growth in Medicaid spending, driven by an increase in overall usage, the introduction of new drugs and rising prices. Consequently, the costs associated with prescription drugs are seen by many states as a top priority in their healthcare cost-containment initiatives.

Over the past 2-3 years, most states have undergone some changes to their Medicaid prescription policies, employing a range of prescription drug cost-control measures. Cost-containment measures employed to date include: prior authorization: designated products require prior approval for each patient. The list of drugs requiring prior approval is determined on a state-by-state basis. Prior authorization is currently active in more than 40 states. Use has increased over the past two years and is the most common cost-containment measure; 64

formularies and drug lists: while Medicaid formularies cannot bar the use of approved products, state-only programs can. Some states, such as Michigan and Florida, have begun to include cost factors in their formulary decision-making processes. While this has led to an increased number of drugs requiring prior approval, barring has not occurred; expansion in generic substitution: approximately 50% of states require the use of generic substitution over brand name products to some extent. In some cases physicians are able to prescribe on a brand necessary basis; review of drug utilization: employed across the US to monitor usage patterns to identify over-usage. This can be used to restrict the number of prescriptions per month; introduction of prescription fees: drugstores charged dispensing fees of $5–$6; introduction of co-payments: co-payments of between 50 cents and $3 have been adopted by more than 30 states; modification of pricing and reimbursement formulae: for example, increasing the discount applied to average wholesale price.

Price controls in Maine? With the price paid by an uninsured US resident for prescription drugs up to 20% higher than the price charged for residents with insurance cover for prescription costs, the discount offered by wholesalers and manufactures on sales to health insurance companies is substantialvii. To address this problem, Maine became the first US state to enforce a significant discount scheme under its Maine Rx scheme in May 2000,

vii

SmithKline skirts Maine over rebate law. Scrip 2565. August 2000:11

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covering uninsured residents not falling into the groups included in Medicare and Medicaid.

Under the Maine law, pharmaceutical manufacturers and wholesalers participating in Maine’s Medicaid or Medicare programs would be required by law to offer similar discount levels to members of the Maine Rx scheme. Currently, the Medicaid scheme receives a 20% discount compared to standard wholesaler prices and the Maine Rx scheme intends to give uninsured residents similar discounts. Under the new law, the US Department of Human Services would act as a pharmacy benefit manager for the Maine Rx scheme and companies wishing to continue within the Medicaid program would have to enter into a rebate agreement. The initial rebate agreement was to fund a 6% discount compared to the average wholesale price for Maine Rx members. The rebate was expected to rise to a discount comparable to the approximate 40% discount received by the federal government over time. In 2003, the Department of Human Services was to review the situation and if drug prices under the Maine Rx program were not comparable to the lowest for the same drugs elsewhere in the state, maximum retail prices would be established. If these were broken, then offending companies would face court action.

Unsurprisingly, the Maine law received a negative reaction from the pharmaceutical industry, with PhRMA filing a constitutional challenge to the law in August 2000. In October 2000, the US District Court for Maine ruled in favor of PhRMA’s request for a preliminary injunction, which means that the law cannot be implemented until a solution to the constitutional challenge has been found. The Court’s ruling also stated that the plan to use prior authorization in Medicaid to “leverage drug manufacturer rebates for the benefit of uninsured citizens” would conflict with Medicaid’s purpose of providing medical benefits to enrolled patients onlyviii.

viii

http://www.phrma.org/policy/statelevel/maine

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On 16 May 2001, a federal appeals court decision upheld Maine’s prescription drug law, reversing an October 2000 decision of a federal district court issuing a preliminary injunction preventing the implementation of the law. The Pharmaceutical Research and Manufacturers of America (PhRMA) challenged the law, arguing that it interfered with the federal Medicaid program and violated the US Commerce Clause by regulating interstate profits. The appeals court found no conflict between the Maine act and Medicaid’s structure and purpose. However, PhRMA appealed that decision to the U.S. Supreme Court and, in doing so, successfully stalled implementation of Maine Rx until the Supreme Court determined whether or not to accept the appeal.

In June 2002, the US Supreme Court accepted the appeal filed by the PhRMA, sustaining the legal barriers that were placed upon Maine Rx two years previously. In October 2002, the Bush administration filed a brief with the US Supreme Court opposing Maine’s pioneering prescription drug law. The brief says states have wide latitude in allowing prior authorization subject to certain conditions, but Maine’s Rx program “undermines congressional intent” because it is not designed to serve the interests of the Medicaid program.

In May 2003, the Supreme Court vindicated Maine’s position and determined that the District Court erred when it enjoined Maine from starting up the program. In light of the Supreme Court decision, Maine made some revisions to the program and renamed the program, Maine Rx Plus.

Now at least 275,000 uninsured Maine residents are eligible to enroll for discounts on their prescription drugs. The litigation continues, however, with the prescription drug companies arguing that Maine Rx Plus requires the State to submit to the federal government an amendment to its Medicaid plan. The drug companies are hoping that the federal government will disapprove of the amendment, effectively stopping Maine from negotiating for discounts with the prescription drug companies.

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Attorneys for the State of Maine and for the Maine Citizen Leadership Fund are fighting this latest move by the prescription drug companies. In the meantime, Maine Rx Plus is up and running with Maine attempting to negotiate additional discounts in 2005.

Florida’s Medicaid drug rebates The Florida’s Medicaid Drug Rebates law, SB 792, was enacted in 2001, allowing the state to negotiate its own discounts on prescription drugs for Medicaid beneficiaries. Florida became the second state (California has negotiated supplemental drug rebates for more than a decade) to enact legislation for supplemental Medicaid rebates, projected to save the state $200 million per year. A further aspect of Florida’s Medicaid law is that it requires the state to create a limited formulary for the state’s Medicare program to which physicians must adhere. An appointed committee will decide what drugs will be placed on the formulary by considering both medical effectiveness and cost-effectiveness. Once the formulary is completed, physicians who wish to prescribe a non-listed drug still can, but must explain their reasons to Medicaid officials.

On 7 August 2001, PhRMA filed a complaint against the supplemental rebate program in Tallahassee federal court. While PhRMA continued to pursue its litigation, BristolMyers Squib and Florida announced on 5 September 2001 that all of the company’s products would be on the formulary in exchange for funding a disease management program. This is similar to the Pfizer formula for access to Florida’s Medicaid.

In January 2002, a federal judge in Tallahassee let Florida’s Medicaid rebate law stand. The ruling was a major setback for the pharmaceutical industry and is likely to prompt other states to follow the lead of Florida. Already, Michigan has implemented a program partly modeled on that of Florida’s. In September 2002, an appeals court upheld the approval of Florida supplemental Medicaid rebate program requiring drug companies to give the state a 10% rebate on top of the 15% discount they are required to provide under federal law.

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Pharmacoeconomics in the US There

have

been

no

significant

regulatory developments in the use of

pharmacoeconomics by either the public or private bodies that provide healthcare in the US. However, considerable cost containment pressures on formularies make pharmacoeconomics a supporting tool for price negotiations with both private and public insurers.

Pharmacoeconomics in public healthcare provision The Healthcare Financing Authority (HCFA) is a US government organization that, through Medicare and Medicaid, funds healthcare for the elderly and those with low incomes. The HCFA establishes policies for paying healthcare providers, assesses the effectiveness of different methods of healthcare management, treatment and financing and takes actions to guarantee a certain level of quality care.

At present, the HCFA has no formal mechanisms for evaluating the cost-effectiveness of a pharmaceutical product or for using pharmacoeconomic studies to support reimbursement decisions. The US public healthcare system offers politicians little incentive to advocate the formal introduction of cost-effectiveness analysis into the reimbursement and pricing process, due to possible controversies surrounding access to treatment. Likewise, cost-effectiveness is not perceived by the HCFA as a means of assessing the price of drugs. The HCFA also considers the use of pharmacoeconomics in the pricing of drugs to be superfluous, given that manufacturers must offer substantial rebates on products sold to the public healthcare system.

Pharmacoeconomics in private healthcare provision Private healthcare providers in the US attempt to contain costs by issuing restricted formularies of reimbursable drugs. These formularies also give private healthcare providers some leverage over the prices set by pharmaceutical companies, as the generation of successful sales for a pharmaceutical product will require formulary inclusion. The use of pharmacoeconomics continues to be very limited within the 69

private market in the US, both amongst MCOs and HMOs. There is no explicit inclusion of pharmacoeconomic criteria to aid reimbursement-related formulary decisions. For example, one of the largest MCOs, Blue Cross/Blue Shield, generally allows FDA approved drugs to be reimbursed based on the single criterion of clinical efficacy.

Less than 10% of private health insurance plans utilize any form of pharmacoeconomic analysis that attempts to identify the economic efficiency of a drug. However, some large MCOs and HMOs, such as Kaiser Permanente and United Healthcare, are beginning to evaluate the cost-effectiveness of both new and existing pharmaceutical products.

These

organizations

are

increasingly

encouraging

the

use

of

pharmacoeconomic data in formulary decisions. However, they are only interested in pharmacoeconomic studies from their own budgetary perspective, examining the impact of new drugs on their costs and not the indirect costs associated with losses in productivity and earnings through illness.

Pharmacoeconomic assessments are only one of many possible factors in the decisionmaking process concerning drug entry onto a formulary in the private US healthcare system. The main factors continue to be clinical efficacy and drug acquisition costs. Studies that evaluate these two parameters in some form of ratio are not used frequently. Pharmacoeconomic studies sponsored by MCOs and HMOs, either individually or through supporting pharmaceutical benefit managers (PBMs), concentrate on cost-minimization studies and cost-consequence analyses. These studies are more driven by the profit and loss account of the healthcare plan or PBM than by any effort to achieve efficiency of resource allocation in the reimbursement of new and existing pharmaceutical products on formularies.

Managed care pharmacoeconomic submissions The Academy for Managed Care Pharmacy (AMCP) is the national society concerned with the practice of pharmaceutical care in managed healthcare environments. In its capacity, the AMCP promotes the development and application of pharmaceutical

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healthcare in managed care environments. The Academy has more than 4,800 members nationally who are part of more than 600 healthcare organizations, which provide comprehensive coverage to over 170 million Americans served by managed care.

In October 2000, in an attempt to standardize the content of formulary submissions, the AMCP published a set of guidelines entitled “Format for Formulary Submissions”. While only guidance, since publication, adoption of the AMCP Format by health systems and the pharmaceutical industry has exceeded AMCP’s expectations. Over the past two years, a network has developed among health systems stimulating initial adoption by managed healthcare systems and PBMs and most recently by hospitals, integrated healthcare systems, state Medicaid agencies and the Department of Defense. As adoption of the Format has spread, manufacturers have begun to standardize the framework within which they present formulary submissions.

In October 2002, the AMCP introduced new guidelines for formulary decision-making processes, which, for the first time, provided guidance requiring the inclusion of economic evaluations. In doing so, the new AMCP guidance increased the submission requirements for pharmaceutical companies seeking to get their products onto the formularies of managed healthcare plans covering more than 170 million people.

Traditionally, formulary decisions have been made on the basis of efficacy, safety and acquisition cost of pharmaceutical products. However, now the additional hurdle of demonstrating value for money has been introduced. Products failing to meet these standards will either appear low down on the treatment list or will be made available only at full price. Certain drug classes for life-threatening diseases, such as cancer and HIV, will be exempt from this practice.

Future use of pharmacoeconomics in the US The highly fragmented nature of the market for pharmaceutical products in the US, together with the limited role of pharmacoeconomic analysis in formulary evaluations, has prevented the emergence of national guidelines for information and analysis to

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support formulary submissions. Both the International Society for Pharmacoeconomics and Outcomes Research (ISPOR) and the Association for Pharmacoeconomics and Outcomes Research (APOR) are attempting to build a consensus on the use of pharmacoeconomic

analysis

to

allow

managed

care

officials

to

integrate

pharmacoeconomics into their formulary decisions. However, a consensus has yet to be reached. In addition, for guidelines to have any significant effect on the reimbursement process in the US, they would have to be enforced by MCOs and HMOs as well as by Medicare and Medicaid.

It is likely that the growing emphasis on cost containment within formulary decisions will see cost-effectiveness been used more frequently in the US. The nature of competition prevailing throughout the US healthcare market will promote the differentiation of products through cost-effectiveness and, therefore, this factor may help determine reimbursement decisions.

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Parallel imports in the US Since 1988, the US has been protected against parallel importing by a rule preventing any company other than the original manufacturer importing pharmaceuticals into the country. This measure was imposed to protect against imports of potentially lower quality entering from non-FDA approved factories in other countries. However, the rising costs of healthcare in the US have become an increasingly political issue and the potential to reduce the cost of drugs by allowing parallel importing has once again been raised in the US.

In October 2000, a bill on agriculture appropriations (HR 4461) was signed into law, having been passed in both the House of Representatives and the Senate. The bill included various amendments to allow individuals and companies other than the original manufacturer to import into the US drugs manufactured in FDA approved plants outside the US. The most important feature of the bill is that, for the first time, the bill would allow pharmaceutical products that have been exported from the US or manufactured outside it to be imported into the US, potentially opening it to parallel trade. Written into the bill is a provision that it remains law for only five years, after which period the results will be reviewed.

The passage of bill HR 4661 and the amendments concerning pharmaceutical importing happened despite substantial concerns that imported products may be out of date by the time they reach the US market, and may even be counterfeits. Amendments require the FDA to take responsibility for the quality and authenticity of imported products. It was expected that it would take at least a year before the processes for these quality checks were set in place for importing to begin. As the bill expires after five years there would be only a limited amount of time for parallel importers to enter the US market: the time limit on the bill was a major disincentive for importers, since any investment will have to be recouped within this finite time limit. However, the Secretary of Health and Human Services has since failed to implement bill HR 4461

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and has ignored the laws’ provision authorizing the Secretary to issue regulations containing “Any additional provisions determined by the Secretary to be appropriate as a safeguard to protect the public health or as a means to facilitate the importation of such products.” On July 31, 2002, the Greater Access to Affordable Pharmaceuticals Act (S.812) passed the Senate by a resounding vote of 78-21. Included were important amendments that expired because of House inaction. Amongst these was a provision allowing for drug reimportation from Canada. The Equal Access bipartisan Canadian import amendment with its’ safe but free trade approach would have saved consumers an estimated $38.4 billion in projected spending on brand name drugs in 2001, based on figures given in the 9/5/01 testimony by Alan Sager to the Senate Commerce Committee. The most obvious parallel importing country authorized by the bill is Canada. Like most European countries, Canada operates a number of price controls on pharmaceutical products to limit healthcare expenditure. This has resulted in significant ‘unofficial’ parallel importing from Canada by patients without medical insurance who have to pay for their own drugs. Regulations allow for a 90-day supply of pharmaceuticals for personal use to be imported into the US. Retired people crossing the boarder to buy drugs was a topic generating considerable interest in the US national press in the run-up to the Presidential election and has increased public interest in bill HR 4461, which is seen as a potential alternative to these journeys. However, commercial parallel importing into the US from Canada would not be as easy as between the countries of the European Economic Area (EEA). Although there will be no trademark issues, as the US operates a policy of total exhaustion of intellectual property rights on an international basis, Canadian legislation will significantly restrict the benefit to wholesalers. This is because the Canadian Food and Drug Act states that goods manufactured for export must be labeled as being ‘for export only’. An export certificate must be included with such goods, stating that, among other things, products were not manufactured or sold for consumption in Canada. In addition, while pharmaceuticals sold for use in Canada are price controlled, those sold for export are priced according to demand on the free market. Therefore, pharmaceuticals re-imported 74

from Canada would not necessarily be substantially cheaper than those sold directly in the US, thereby limiting the benefits for potential parallel traders. The US pharmaceutical market is unique in several ways. The same factors that affect parallel trade in Europe will not necessarily apply in the US. The US is, superficially at least, highly attractive for importing, mainly due to its high prices and its large volume sales. However, cultural factors currently weighing against parallel importing, such as consumer preference for US-manufactured products and wholesaler reluctance to undertake importing, repackaging and relabeling, may prove very difficult to overcome. Figure 2.10: Drivers and resistors of parallel imports into the US

Drivers High price of drugs High volu me market Cultura l and regulatory unifo rmity

Resistors Failure to imp le ment provisions of HR 4661 Delay while developing safety procedures Five year e xpiry of b ill Opposition from wholesalers Resistance from consumers Insufficient supply

Business Insights

Source: Delphi Pharma

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The five year limit on bill HR 4461, combined with the delay that will be incurred through the need to develop quality checks that will reassure the most conservative consumers, will reduce the amount of time available for importing to three or at the most four years. Therefore, any company that invests in the infrastructure required to begin importing into the US, whether a domestic wholesaler looking for new sources or a European or other exporter, can expect only limited return on its investment. However, the overriding resistor to the uptake of parallel trade in the US is the failure of the Secretary of Health and Human Services to implement bill HR 4461 and to issue regulations to facilitate the importation of drugs from approved sources.

Developments in cross-border trade Recent developments in cross-border trade include the largely negative conclusions from a recent task force report as well as high degree of state-level activity in promoting or forbidding internet pharmacy sales.

Reimportation task force report… In early 2005, research commissioned by the Bush administration reported on the impact of drug importation on health and safety, healthcare costs and the development of new medicines in the US. The broad conclusion was that the commercial importation of medicines with the necessary safeguards is feasible in the US – but may prove to be too costly.

The analysis was carried out by a reimportation task force established by the department of Health and Human Services (HHS) in March 2004. HHS was asked to submit a report on importation in the Medicare Modernization Act (MMA), signed into law in December 2003. The Act contains provisions permitting the importation of prescription drugs into the US if the Secretary for HHS certifies that: imports pose no additional risk to public health and safety; imports provide significant cost savings for American consumers;

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To date, no HHS Secretary has been prepared to certify that these conditions could be met if importation were legalized.

According to the task force, one of the difficulties in liberalizing the rules governing importation is that it requires modifying a drug regulatory system already regarded as the ‘gold standard’ for ensuring drug quality, safety and efficacy. Legalizing importation opens up this closed system, which poses a risk to consumer safety

The task force recognized that some forms of importation are more risky than others. Over 40% of prescription drug imports are obtained through “foot traffic”, while the remainder are purchased over the internet. Patients traveling on foot to Canada to obtain brand name drugs available in both the US and Canada were considered to be relatively safe. However, the task force believes the latter poses greater cause for concern. Many transactions occur via poorly-regulated and occasionally bogus internet operations that have been documented in some cases to provide consumers with inferior products.

The report concedes that legalizing importation on a commercial scale would be preferable to personal importation. With a commercial importation scheme specific measures could be implemented to maintain a closed distribution system with necessary checks and balances. However, it would be more difficult to achieve this result if personal importation were legalized, with thousands of small packages entering the US without proper monitoring.

However, the cost of implementing and maintaining the safeguards necessary to support a commercially run importation system, including the authorities needed to inspect imported products, would likely outweigh the savings. The task force determined that an elaborate regulatory importation regime would have the effect of adding costs to drugs so that in the end, drugs would be just as expensive, slower to get here and, possibly, less safe.

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The negative conclusion of this report has severely dented the chances of reimportation legislation in the US. However, for advocates of reimportation the battle continues. Illinois plans to continue offering its I-Save Rx programme, which allows citizens in Illinois, Kansas, Missouri and Wisconsin to obtain cheaper medicines from Canada, the UK and Ireland. Meanwhile, lawmakers have not given up the fight for importation legislation and plan to continue lobbying for legislation in 2005.

State-level action… In late 2004, California Governor Arnold Schwarzenegger vetoed bills enabling Californians to import cheaper drugs from Canada. The Governor determined that assisting Californians to reimport prescription drugs would “violate federal law” and “over-simplify the complex safety, trade, supply and pricing issues involved in the marketplace”. However, Schwarzenegger has opened negotiations with manufacturers to secure discounts for the low-income uninsured population under a new programme called California Rx. The Governor plans to propose more detailed legislation in January 2005.

In late 2004, Maine sought a waiver from Health and Human Services (HHS) to import drugs from Canada, with a plan to use a local American Indian tribe to distribute the medicines. The Penobscot Indian Nation will operate a warehouse to store imported drugs and distribute them to local Maine pharmacies. However, HHS has so far declined to give its approval for importation schemes, arguing that the safety risks outweigh the benefits.

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Generic substitution in the US The Trade-Related aspects of Intellectual Property rights (TRIPS) provision of the General Agreement on Tariffs and Trade (GATT) decrees that the minimum duration of a patent must be 20 years from the date of filing. This extension from the 17 years previously enjoyed by US patented products applied to any company holding valid patents at the ratification date of December 1994. This extension placed generics companies at a disadvantage compared to the situation prior to GATT, delaying the expiry of key product patents and threatening generic companies’ profits. To offset this disadvantage, GATT legislation provided for generics companies that had already made substantial investment in R&D at the ratification date and had been in a position to launch a product at the end of what would, under the old legislation, have been the 17-year period of patent protection. The agreement allowed these generics companies to proceed with launching their products, under the condition that ‘equitable remuneration’ was paid to the patent owner. This translated into royalty payments of 3– 7% of sales of the generic version during the new patent protected time period, which could not be contested by branded manufacturers if they disagreed with the level of compensation.

The Waxman-Hatch Act The Waxman-Hatch Act, which dates back to 1984, is an integral part of FDA regulations and its influence on prescription drug pricing and development makes the US a particularly attractive market for generic products. The Act is designed to encourage generics manufacturers to launch products as soon as possible after a branded product has lost patent protection. The Roche/Bolar provision of the WaxmanHatch Act of 1984 allows generics companies to develop versions of patent protected products (i.e. run production and laboratory tests) while the patent is still in force. Furthermore, Waxman-Hatch permits generics manufacturers to view the original drug developer’s safety and efficacy data filed at the FDA as part of the regulatory approval process. After this, generics companies can submit an abbreviated new drug application

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(ANDA) to the FDA, together with proof of bioequivalence. In return for these privileges and to reward and encourage innovation, brand manufacturers may be entitled to additional patent protection from generic competition: five years of additional market exclusivity may be granted for new active ingredients; three years of additional exclusivity may be granted for a new drug application (NDA) if another NDA with the same active ingredient has previously been approved and certain other conditions are met; three years of additional exclusivity may be granted for an NDA supplement.

Not all NDA supplements are eligible for the additional three to five years of patent protection. To qualify, clinical investigation reports must be included with the supplement, the clinical investigations must be new and the NDA applicant must have conducted or sponsored these investigations. Finally, all of the clinical studies must be ‘essential’ to the approval of the supplement. Thus, the Waxman-Hatch Act attempts to provide balanced benefits for both generics and research-based pharmaceutical companies.

Although the Act is complementary to the worldwide GATT agreement, no similar provision is provided in European law. The Act was further upheld by the US Patents and Trademarks Office (PTO) in June 1995, which also ruled that companies benefiting from Waxman-Hatch are not permitted to take any additional extension under GATT.

Pediatric exclusivity provisions Most pharmaceuticals are specifically indicated only for adults. In the US, the FDA Modernization Act of 1997 addressed this issue in an attempt to prevent drugs being used in inappropriate doses or applications to treat children. In return for conducting pediatric trials on medicines commonly used in children, pharmaceutical companies are

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given an additional six months of patent protection. For the highest selling products, this can mean several hundred million dollars of additional revenues for the originator.

The pediatric exclusivity provisions of the FDA Modernization Act have caused controversy among generics and pharmaceutical companies. The Pharmaceutical Research and Manufacturers of America (PhRMA) and the Generics Pharmaceutical Association are both discussing the requirement to perform pediatric clinical trials. It is not specifically stated in the Act whether only the originator should be required to complete pediatric trials and not generic companies if a drug is multisource (i.e. if both generics and the original are available). If all companies are obliged to conduct these trials, this favors the higher margin pharmaceutical companies with larger R&D budgets over generics manufacturers. Furthermore, pediatric marketing exclusivity can be applied to combination formulations, even to those combinations not indicated for pediatric diseases, thereby delaying the market entry of generic equivalents. If it is decided that all companies are required to complete pediatric clinical trials, generics manufacturers would suffer from the need for greater investment in testing prior to approval.

To date, the issue of obligatory pediatric trials remains unresolved. Congress reauthorized the pediatric exclusivity incentive at the end of December 2001. PhRMA continues to argue that the exclusivity incentive makes mandatory rule unnecessary. However, in March 2002 republicans Henry Waxman, John Dingell and Sherrod Brown said, in a letter to President Bush, that the FDA’s plan to suspend for two years a rule requiring drug makers to study their drugs in children “will ... strip FDA of its ability to require pediatric testing for existing drugs.”

Another key issue surrounding the granting of additional pediatric exclusivity is the possibility that the additional marketing exclusivity could run concurrently with the 180-day exclusivity granted to a generics manufacturer that has successfully challenged a patent’s validity (a paragraph IV litigation). In such a situation, the generics company that is first to file an ANDA would have its market advantage nullified by being held back from launching its own version while the pediatric exclusivity is in place. The 81

situation has led to a proposed tightening of the regulations to ensure that any granted extension delays the start of the 180 day exclusivity period, maintaining the incentive for generics companies to challenge originator patents.

Anti-competition agreements Forming alliances between generic companies and the originator can be valuable because of the 180-day exclusivity rule in the Waxman-Hatch Act. The exclusivity applies to the first generics company to file an ANDA to market a generic version of a branded pharmaceutical. If the ANDA was filed before the original patent expiry, then the generics company can be sued for patent infringement. The 180-day market exclusivity starts when a court finds in favor of the generics company. Therefore, agreements that delay settlement also delay the start of the 180 days of exclusivity and, consequently, delay the launch of a generic competitor. Furthermore, until a settlement has been reached, no other generics company can launch a competing product and, thus, there is no risk of further court cases to challenge the patent held by the originator.

Legislation proposed in August 2000, aimed to ensure that agreements between research-based manufacturers and generic companies that could result in a delay in the marketing of a generic drug are notifiable to the Federal Trade Commission (FTC) within 10 days of signing the agreement. Presently, if the company filing the first ANDA for a bioequivalent of a marketed brand does not actually launch its product, then no other company can launch a bioequivalent generic until a court decision regarding the validity of the ANDA and the infringement of any patents is reached. This has led to a number of pharmaceutical and generics companies reaching agreements that have resulted in the delayed launch of generics.

As an example of the above strategy, in April 1998, Abbott paid the generics manufacturer Geneva (a subsidiary of Novartis) $4.5m on a monthly basis to prevent it marketing a generic version of Hytrin (terazosin) and the payments continued until the

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agreement ended in August 1999. This meant that no other generic could be launched in the meantime.

Improved legislation should enable the FTC to enforce anticompetitive laws more effectively by making companies reveal such strategies. Furthermore, clarification of the opportunity to reach agreements between two parties involved in a patent infringement suit may benefit smaller generics companies. If there is the possibility of a generics company winning its case, the original brand marketer may actively choose to enter into an agreement and make payments to delay the decision. However, this would risk anticompetitive charges from the FTC, which is not a feasible option for smaller generics companies. Furthermore, the change in start date for the 180-day exclusivity, discussed below, means that, once any court decision has been reached, the period of marketing exclusivity begins. As such, delaying the final decision does not delay the date at which additional generic competition could enter the market. Small generics companies should benefit, therefore, from a shortened delay before launch, allowing them to maximize the potential of their pipelines.

The Drug Competition Act (S.754), introduced by Senator Patrick Leahy (D-VT), requires brand-name companies and first generic applicants to provide copies of certain agreements to the FTC and the DOJ. According to the report, although the 180-day marketing exclusivity period provided by Hatch-Waxman to first-filing generics “was intended to increase the economic incentives for a generic company,” this provision also has enabled generic and branded companies, in some instances, to enter into agreements that had the potential to “park” the 180-day period for some time. In these circumstances, the first generic applicant does not trigger the running of the 180 days, so the FDA is prevented from approving any other generic applicants to enter the market. During the time period covered by the study (1992-2000), the report states, there were 20 settlements of patent litigation related to generic entry prior to patent expiration. Of these settlements, at the time they were executed, 14 of the 20 had the potential to delay the start of the generic applicant’s 180-day marketing exclusivity and thus to delay all subsequent generic entry.

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The Drug Competition Act (S. 754) was eventually passed by the Senate in November 2002. Brand name and generic companies are now required to report their deals to the Federal Trade Commission (FTC) and the Justice Department’s Antitrust Division so that these antitrust enforcement agencies can promptly investigate any aspects of the deals that raise competitive concerns.

Delaying tactics and 180-day exclusivity In April 2000, the FDA accepted a district court ruling that changes the date from which the 180-day marketing exclusivity period for a newly launched generic drug applies. For new ANDAs filed from 30 March 2000, exclusivity now begins on the date of the first ruling in a patent infringement suit, while previously it began after the final decision, from which no appeal can be launched, was made.

The changed start date for the 180-day exclusivity period has significant implications for generics companies wishing to file an ANDA. Due to this ruling, once an initial decision in a patent infringement case has been made, a generics company must launch its product immediately, otherwise it will lose time from the 180-day exclusivity. However, launching directly after the first ruling involves higher risks because a future appeal could reverse the initial decision and find in favor of the original brand manufacturer. The cost of marketing the generic product until that point would then have been wasted because the generic would have to be withdrawn.

The change in policy is a result of the court case between Mylan and the FDA in which Mylan challenged the interpretation of the Waxman-Hatch Act. Mylan wanted the 180day exclusivity period to start earlier, allowing it to launch a second generic competitor (after Geneva’s product) to Abbott’s Hytrin (terazosin). However, despite the success of the court case, it does not apply retrospectively and, therefore, Mylan was delayed in launching its generic version while Geneva enjoyed the 180-day period of exclusivity.

In July 2002, the Greater Access to Affordable Pharmaceuticals Act (S.812) passed the Senate. The Act aims to close the loopholes that allow brand-name drug companies to

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block generic drugs from coming to market. By delaying and extending the process in which generic equivalents get approved, pharmaceutical companies have continued selling their brand-name products at high prices long after their patents have expired. The Congressional Budget Office estimates that closing the loopholes in the law could save taxpayers $60 billion over the next years.

The Greater Access to Affordable Pharmaceuticals Act makes the following provisions: eliminates the automatic 30-month stay of FDA generic approval when a brand name sues the generic for patent infringement. A court’s preliminary injunction would be necessary to stay FDA generic approval; the 180-day exclusivity period granted to the first-to-file generic applicant would become available to the next-filed applicant if the first-to-file generic company reaches a financial settlement with the brand name to stay out of the market or fails to go to market within a reasonable period; codifies existing standards used by FDA to determine bioequivalence; requires brand name manufacturers to list all of a drug’s relevant patents and certify with the FDA that the list is complete and accurate. Expedites legal process for challenging late-listed patents; enables generic drug makers to seek a declaratory judgment from a court to determine the merits of their patent challenge.

Biogenerics Generic biopharmaceuticals, follow-on biologics, biosimilars or similar biologicals – depending on the scientific and regulatory perspective involved – have a significant market potential and are focusing the attention of many in both the generic and innovator pharmaceuticals industry. One product in particular, the somatropin-based human growth hormone developed by Sandoz, Omnitrop, has become the focal point,

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as it has been affected by unexpected delays in the US and Europe. In the US, the delay was announced ahead of a scientific workshop staged by the Food and Drug Agency (FDA) in mid-September 2004.

The workshop was the latest regulatory development for biogeneric development in the US. The FDA meeting followed a Senate Judiciary Committee hearing in June 2004, which had been called to address FDA progress on the issue of the regulation of biogenerics. Such guidelines have still yet to be developed.

The Senate hearing and subsequent scientific workshop took place in the context of several Congressional bills aimed at developing a pathway for biogenerics, in order to help bring down healthcare costs. In April 2004, Genentech filed a petition arguing that analytical data and information generated from one biotechnology product is not sufficient to support approval of a product manufactured through a different process.

Another FDA workshop will take place in early 2005, with the FDA likely to delay issuing any guidance on pathways for the approval of biogeneric products until after this meeting. However, the news in October 2004 that Sandoz had succeeded in gaining marketing approval for Omnitrope in Australia is highly significant, and is expected to have a considerable impact on attitudes to biogenerics in Europe and the US.

Given that biogenerics have yet to be approved in the US or EU, pricing is a matter that is as yet undetermined. Given that it is not yet clear to what extent clinical and preclinicals will be required to support applications, the costs of bringing products to market is not yet clear. This cost is a significant factor in relation to the pricing of other generics. However, it is not anticipated that biologic follow-ons will be drastically reduced in price, as is the case of chemical generics. The critical factors are cost of goods and the fact that they are follow-ons, rather than generics. Follow-on manufacturers will have to rely on sales and marketing staff in order to address the benefits of the products, which would further increase their cost.

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Trends in generic usage The use of generic drugs varies markedly across US states, according to a new study 0f 2003 data by the pharmaceutical benefit manager (PBM), Express Scripts. The study looked at per capita generic drug usage among three million pharmacy benefit plan members aged between 18 and 64. The results showed that Massachusetts had the highest generic dispensing rate (51.3% of all prescriptions), followed by New Mexico (50.4%) and Oregon (50.2%), while New Jersey had the lowest (39.5%). Reasons behind these differences across states include differences in prescribing patterns, state regulations, disease prevalence and drug benefit designs.

‘March-in’ law… In late 2004, the National Institutes of Health (NIH) rejected an application from a company seeking permission to market a generic version of Pfizer’s ocular treatment, Xalatan (latanoprost), before its patent expires. Essential Inventions asked the NIH to enact a 1980 ‘march-in’ law that would allow the drug, which was developed with the help of government funds, to be marketed at a lower price. According to the company, the drug is currently priced around two to five times higher in the US than in Canada and Europe. A similar request to sell cheaper versions of Abbott’s Norvir (ritonavir) was denied earlier in 2004. The NIH said it “believes that the extraordinary remedy of march-in is not an appropriate means for controlling prices”.

Future pricing scenarios in the US In a continually changing pricing environment, it can be difficult to predict future pricing scenarios. However, for the purposes of planning and forecasting three alternative pricing scenarios in the US are presented below. The scenarios are based on a five-year outlook and include a best case, worst case and most likely scenario. Scenarios are presented from the perspective of the pharmaceutical company aiming to achieve the highest price possible for the broadest range of products.

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Table 2.4: Future pricing scenarios in the US Best case

Worst case

Most likely

Wider access and compliance through Medicare funding, while maintaining high prices

$400 billion Medicare bill results in lower prices and budget cuts elsewhere

Mixed results from Medicare bill, including wider access/ compliance and budget cuts

Limited state-level cost cutting while Medicaid expenditure continues to increase

Cost containment limits Medicaid expenditure, while individual states negotiate additional rebates

State-level rebate interventions are limited, while Medicaid expenditure remains high

Re-enforced protection from Canadian reimportation and slow development of generics and biogeneric regulations

PBM use of health economics, reimportation legislation and biogeneric equivalent ANDAs

Health economics used to justify premium prices, reimportation limited to state-level and generic competition unchanged Business Insights

Source: Delphi Pharma

Best case pricing scenario Under the best case pricing scenario for pharmaceutical companies in the US, the 2003 Medicare Prescription Drug Act would lead to wider access, improved compliance and increased utilization. Prices for effective drugs would remain high while volumes would increase in line with the widened coverage. The reduced pressure from lobbying seniors means that drug prices for chronic diseases associated with old age remain high into the future.

A best case pricing scenario would also involve a cut-back on state-level activity involving the negotiating of rebates for Medicaid. Rebate schemes would be limited to Maine and Florida and would not be extended further. Federal level and high courtlevel intervention would limit state-rebates. Meanwhile, Medicaid spending remains high with budget relief coming from other cuts in and federal level funds. Finally, a best case scenario would involve re-enforced protection from Canadian reimportation. Legislative plans will be shelved and state-level importation programmes will be successfully challenged in the courts and limited though limitations in supply. Generic legislation will continue unchanged, but pharma companies will work harder to challenge generic entry and limit uptake through line extensions and reformulations.

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Biogeneric regulations will be enforced requiring submission of full trial data for follow-up copy products.

Worst case pricing scenario Under a worst case pricing scenario, the pharmaceutical industry in the US would be hard hit by the government’s $400 billion Medicare bill. The results of the extended coverage would be slow in generating increased usage, while quick in generating cost containment cuts across Medicare and other government-level drug benefit schemes. In a worse case pricing scenario Medicaid expenditure would be severely limited in the future in order to reverse 10 years of continued growth. The result would be significant rebates and limited formulary lists for Medicaid drug plans. At the same time, more states would sign on to individual rebate schemes, generating significant rebates on a company-by-company basis.

Finally, in a worse case scenario, PBM’s would make a wider use of pharmacoeconomic evaluations in line with AMCP guidelines. Reimportation legislation would come into force, allowing the free trade of products from Canada by licensed wholesalers. At the same time regulations would be established allowing biogeneric copy products to submit ANDA-type submissions based on bioequivalence and requiring no additional studies.

Most likely pricing scenario Over the next five years, the most likely pricing scenario in the US will involve mixed results from the recent Medicare drug plan. Returns from widened access will be slow but positive, while the $400 billion investment will lead to increased cost containment efforts in other areas, including the wider Medicare program and state-level budgets for Medicaid expenditure.

In the most likely pricing scenario state-level rebate interventions already in place will continue, but will not escalate to a wider number of states. Cost containment at the state level will continue but will maintain Medicaid budgets at their current levels. 89

Budgets will still be overallocated, but Medicaid expenditure will be given high priority and remain high.

Finally, in a most likely scenario health economic evaluations will only be used on a voluntary basis for pharmaceutical companies to justify high prices for premium products. Canadian reimportation will continue to be limited to state-level programs, with no consensus reached at the legislative level. At the same time generic competition will continue unchanged striking a balance between the protection of innovative product returns and maximizing access to effective medicines.

Canadian pricing regulations Health care provision in Canada is primarily funded by the federal government, with the majority of healthcare free at the point of use, The federal government pays transfer payments to each province, which in turn manage the delivery of health care. The Canada Health Act sets out the regulatory framework within which Canadian provinces administer the majority of health care services. However, the Act only covers medications prescribed as part of institutional care. All other aspects of pharmaceutical policy are left to individual provincial health care ministries. A wide variation exists across provinces in the way in which medicines are financed.

Public funding is used primarily to subsidize drug costs for the elderly and those receiving social assistance. As a result, the share of total pharmaceutical expenditure accounted for by public expenditure is significantly lower in Canada compared with other developed countries. Each of the provinces subsidizes the cost of prescription medicines for some part of the population through their provincial drug benefit programs. The vast majority of Canadians also have some form of private coverage for prescription medicines.

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Federal measures The patented medicines price review board (PMPRB) is an independent body created by Parliament in 1987 to protect consumer interests and contribute to Canadian health care by ensuring manufacturers do not charge excessive prices. The PMPRB reports directly to Parliament through the Minister of Health.

The PMPRB is responsible for regulating the prices of patented prescription and nonprescription products. If the Board finds that an ex-manufacturing price is excessive it may order the patentee to reduce the price and take measures to offset any excessive revenues received. The PMPRB has no authority to regulate the prices of non-patented drugs, including generic drugs sold under compulsory licenses, and does not have jurisdiction over prices charged by wholesalers or pharmacists.

Section 85(1) of the 1987 Patent Act sets out those factors that the PMPRB must take into account when determining whether a medicine is being sold at an excessive price. These factors include: the prices at which the medicine has been sold in the relevant market; the prices of other medicines in the same therapeutic class; the prices of the medicine and of the other medicines in other countries; changes in the Consumer Price Index; such other factors as may be specified by regulations.

The ‘reasonable relationship test’ considers the association between the strength and the price of the same medication in the same or comparable dosage forms. The test defines a maximum non-excessive introductory price for the new drug. The ‘therapeutic class comparison test’ compares the price of the new drug under review with the prices of drugs that are clinically equivalent and are sold in the same market at prices that the PMPRB considers not to be excessive. The ‘international price

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comparison test’ compares the average transaction price of the drug under review with the publicly available ex-manufacturing prices of the same medicine sold in other countries, including Germany, France, Italy, Sweden, Switzerland, the UK and the US.

Government-led measures have recently looked to ease access to generics. Changes to intellectual property regulations have been proposed to speed up the market entry of generic drugs, while at the same time encouraging the continued research and development of innovative new drugs. Generic manufacturers have welcomed the regulations limiting the practice of ‘evergreening’, which in the past has allowed brand manufacturers to file new patents on a product towards the end of the original patent’s life, with the purpose of delaying generic competition.

Provincial measures The provincial drug benefit programs differ in the subsection of the population they assist. The provinces of Alberta, British Columbia, Quebec, Manitoba and Saskatchewan offer universal coverage. In Ontario, the Tillium Drug Plan is available to those not covered by the Ontario Drug Benefit Plan, providing they meet the income requirements.

Large variations exist in employee benefit plans, both in terms of the services covered and the amount of coverage. Typically, the terms of coverage and contributions are arrived at through negotiations between individual employers and insurance companies. Each provincial drug plan, except BC’s Pharmacare, employs a formulary to set out the drugs available for reimbursement. If a drug is not included on a formulary, the drug plan will reimburse only the cost of a therapeutically equivalent product.

In British Columbia, a reference pricing system was introduced in 1996 by the provinces Pharmacare drug benefit program. In this system drugs which are used to treat the same clinical conditions are assigned to the same reference class. Patients are reimbursed at the price of the lowest cost drug within a reference class. Patients

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prescribes higher priced products have the option to pay above the reference price, or to ask for a cheaper drug. Reference pricing has also been introduced in the province of New Brunswick, with a system similar to that of the system used in British Columbia. Each province employs a committee which reviews drug submissions to determine if a product can be placed on the formulary of the drug benefits list of approved medications.

Each provincial drug benefit program includes cost sharing or user fees policies. Beneficiaries are required to make a financial contribution towards the price of the medicines they acquire. These policies are able to reduce overall costs, but do not necessarily lead to increased use of lower cost medicines. Generic medicine prices are established in provincial formulary pricing policies. Across the country, the average discount in price associated with purchasing a generic versus an originator drug is estimated at 50%. In Ontario, it has been determined since 1994 that the first generic product on the market must be 25% cheaper than the original brand, and subsequent generic entrants must be priced a further 10% lower.

All provincial drug benefit plans have prescribing guidelines and formularies that favor generic medicines. Additional policies to encourage the prescribing of generics by physicians includes instruction and encouragement during medical education to use generic drug names and prescribe generic medicines. Each province in Canada mandates generic substitution to some extent. The methods used are to either regulate substitution by pharmacists as mandatory, or to cover only the low cost alternative or reference-based price in the reimbursement conditions of the provincial plan. In the provinces of Alberta, British Columbia, and Quebec the latter system is in place.

Driving down prices At the end of 2004, the Patented Medicines Process Review Board (PMPRB) reported that manufacturer prices of patented drugs in Canada actually fell in 2003. The PMPRB’s Patented Medicines Quantity Index (PMQI) shows that the volume of patented drugs sold in 2003 rose 14.1% compared to the previous year. The increase is,

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however, the lowest since 1996. Drug prices, on the other hand, had less impact on total drug expenditure, with prices of patented drugs falling by 1.1% in 2003, according to the PMPRB’s Patented Medicines Price Index (PMPI).

In 2003, the PMPRB reviewed the prices of 64 of the 70 newly-marketed patented products. Of these 64 products, 52 were found to be within the guidelines and 12 subject to further investigations on account of appearing to have prices outside the guidelines. A total of 974 existing patented product prices were also reviewed, with 91.5% found to be within the guidelines and the remainder either subject to further investigation or still under review. Investigations result in one of three outcomes: closure of the case without further action, submission of a Voluntary Compliance Undertaking (VCU) by the patentee to reduce the price and payback any excess revenues, or initiation of a public hearing to determine if the price set is excessive.

A number of manufacturers submitted VCUs in 2003 and 2004, lowering the price of products such as Aromasin (exemestane), Dostinex (cabergoline), Remicade (infliximab) and One-Alpha (vitamin D). Sanofi became the latest company to avoid a public hearing by submitting a VCU for its hyperuricemia product Fasturtec (rasburicase) in June 2004. To comply with the PMPRB’s pricing guidelines, the VCU required the company to reduce the price of its product from Cn$295 per vial to less than Cn$125 per vial – the maximum non-excessive price calculated by the PMPRB.

Reimportation In early 2005, the Canadian government announced plans for a crackdown on Canadian internet pharmacies used by US citizens to obtain low price prescription drugs. Health Minister Ujjal Dosanjh laid out possible options for curtailing the trade, including making it illegal for Canadian doctors to countersign prescriptions from other countries, prohibiting doctors from writing prescriptions for foreigners (unless they are visitors), and establishing a list of drugs that cannot be exported in the event of shortages. Restrictions are considered to be necessary in order to ensure an adequate

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supply of drugs and prevent Canadians from having to pay more for prescription medicines.

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CHAPTER 3

Pricing and reimbursement in Europe

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Chapter 3

Pricing and reimbursement in Europe

Summary The major European pharmaceutical markets operate a variety of different healthcare systems subject to differing cost containment measures. In pricecontrolled countries, such as Spain and Italy, budgetary responsibilities and controls are devolved to the regional level. In traditional prescriber-led markets, such as the UK and Germany, national hurdles including NICE and positive lists have been introduced. Historically, European regulatory authorities have taken different approaches to controlling public drug benefits, with some focusing on limiting demand, as evidenced by the devolved budgets found in Germany and the UK, and others on regulating price, as is found in France, Italy and Spain. However, some countries, including Italy and Spain, are adopting both approaches, extending greater regional autonomy for healthcare and budget delivery. Over the next five years, the most likely European pricing scenario will involve continued convergence of prices across different markets, resulting from the ongoing pressures of parallel trade and reference pricing. Average prices will tend towards the middle of the current range, with high price markets such as the UK and Germany lowering prices and low price markets such as France, Italy and Spain increasing average prices, particularly for innovative therapies. In the most likely pricing scenario the impact of pharmacoeconomics, parallel trade and generic substitution will continue to increase gradually. These indirect cost containment measures will continue to play an important role in managing the healthcare spend for all European Governments. The accession of 10 new countries to the EU will have a small, but negative, effect on prices throughout the EU-15.

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Introduction The pricing environment in Europe is primarily determined by its healthcare system and pricing regulations. However, other issues such as pharmacoeconomics, parallel importing and generic substitution also impact on pricing decisions in the European pharmaceutical market. Following a number of recent developments in the European pricing environment, future drivers and resistors for pharmaceutical pricing are unclear. However, an understanding of the best, worst and most likely future pricing scenarios help to provide guidance as to how to manage those functions impacting on future pharmaceutical pricing and reimbursement decisions.

European pricing regulations The major European pharmaceutical markets operate a variety of different healthcare systems subject to differing cost containment measures. In price-controlled countries, such as Spain and Italy, budgetary responsibilities and controls are devolved to the regional level. In traditional prescriber-led markets, such as the UK and Germany, national hurdles including NICE and positive lists have been introduced.

Historically, European regulatory authorities have taken different approaches to controlling public drug benefits, with some focusing on limiting demand, as evidenced by the devolved budgets found in Germany and the UK, and others on regulating price, as is found in France, Italy and Spain. However, some countries, including Italy and Spain, are adopting both approaches, extending greater regional autonomy for healthcare and budget delivery. Looking at Spain as an example: regional approval committees evaluate the use of expensive products, such as the evaluation of growth hormones, interferons and drugs for Alzheimer’s disease in Catalonia;

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the use of expensive drugs to hospitals are limited, such as the use of antiretrovirals; reference pricing is applied for ambulatory care, such as the 17% discounted pricing of ambulatory drugs in Andalucia.

In Europe, 3 of the 5 major pharmaceutical markets employ external reference pricing systems. France, Italy and Spain reference the prices of drugs in other European markets in order to arrive at a weighted price for reimbursement. Figure 3.11 illustrates the increasing interdependency and complexity found in European price setting. Figure 3.11: External reference pricing in Europe, 2004

Belgium Germany UK

France Italy Netherlands

Spain

Finland

Ireland

Low est price + country of origin

Greece

Switzerland

Excluding Greece, Portugal, Spain

Portugal

Average EU price 12 countries (4 mandatory) 2 price controlled

EU average

Low est price

European Union

EU average

EU countries A Non-EU countries

B

Norway

Denmark

Country A references country B

Business Insights

Source: Delphi Pharma

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France The French statutory health insurance system has close to universal coverage of the country’s population. Individuals are enrolled into an insurance fund based on their occupational status. Approximately 90% of the French population are voluntary members of supplementary sickness funds or subscribe to private health insurance.

To gain reimbursement drugs must be registered on the list of reimbursable drugs with costs covered for members of the social security scheme (liste Sécurité Sociale et Collectivités). To achieve registration, drugs are assessed by the Transparency Commission. Whereas approval is based on efficacy, tolerance and safety of use, the Transparency Commission assesses the medical benefit delivered by the new drug. Technical dossiers, which manufacturers must be submitted to the Transparency Commission, contain a wide range of details: product characteristics (classification, pharmacology); epidemiology of the disease; comparator products; recommendation of a therapeutic strategy; analysis of clinical trial results (safety and efficacy); sales estimates by target population.

Drugs are also assessed in the context of the ‘Amelioration du Service Medical Rendu’ (ASMR). The ASMR is a scale that evaluates the level of medical service delivered by a drug. In applying the ASMR the Commission considers the added therapeutic value that the proposed drug would offer to the French healthcare system. The medical benefit offered by a new drug is then compared with that of existing therapies.

The Transparency Commission then forms an opinion as to whether a drug should be added to the list of drugs that are reimbursable under the national health system, and at 100

which particular reimbursement rate. Depending on the results of these assessments, reimbursement can range from 35% to 100% of a product’s cost. The Transparency Commission then passes its opinions onto the Economic Committee for Health Products (Comité des Produits de Santé, CEPS), which has final responsible for setting the product’s price.

The drug’s manufacturer must submit a separate dossier to the CEPS containing information regarding any economic evaluations that have been carried out and any comparisons of cost with other products. As part of its assessment, the CEPS may consult with an advisory group of experts in pharmacoeconomic evaluations. The CEPS will then engage in negotiations with manufacturers, which ultimately result in agreement over the product’s pricing. Over recent years, the French authorities have sought to increase the role of economic evaluations in pricing and reimbursement decisions for new drugs. Submission of economic evaluations is not mandatory, but pharmaceutical companies are advised that submission is good practice and as such economic evaluations are a regular component of submissions.

In 2003, the CEPS concluded a total of 624 product pricing applications. Rises were reported in all categories, especially price alterations, of which there were three time as many than the previous year owing to the implementation of the reference pricing system (TFR). The average time for processing applications was 216 days in 2003, an 11% reduction compared to 2002 (243 days). The time required for the pricing procedure is still extensive and is unlikely to improve given the creation of two new institutes under the health insurance reform law: the High Authority for Health, which will be responsible for the Transparency Commission. The time required by the Transparency Commission to give its advice to the CEPS regarding the reimbursement category is already an average of 125 days, and may well increase owing to the complexity of new administrative procedures;

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the National Union of Health Insurers (UNCAM), grouping the public health insurance funds, which will also be given a role in the determination of drugs’ reimbursement rates.

Recent developments… At the end of 2002, French Health Minister, Jean-Francois Mattei, announced plans to cut 835 ‘ineffective’ medicines from the reimbursement list over a 3-year period. The French government also announced plans to rollout an internal reference pricing system over the next three years. Under the scheme, the price of multi-source drugs (i.e. drugs for which generic versions exist) will be set to reflect the prevailing generic price. Therefore, the scheme will be weighted against off-patent products. The government has also stated that hundreds of products deemed to have low medical benefit would be de-listed from the reimbursement system over the next two years.

However, in order to address the need for innovation, and to act as a counterweight to cost-cutting initiatives, the scheme also looked to raise prices for new and innovative drugs. It is intended for French prices to be brought into line with other northern European nations. The system will use prices set in other northern European markets to set a maximum price level, with companies able to suggest prices up to this benchmark level. The previous system resulted in some companies withdrawing from negotiations and launching products outside of reimbursement because the company’s expectation of price had been higher than that suggested by the government. Merck’s migraine drug Maxalt (rizatriptan), which was approved for marketing in 1998, is one such example.

After pricing negotiations with the French government ran for longer than a year, Merck withdrew from talks and launched Maxalt on the market without approval for reimbursement. In Merck’s view, accepting a low French price would have negatively impacted the price of Maxalt in those markets that use France as a reference when making pricing decisions and would have likely resulted in an added downside from parallel imports.

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At the end of 2004, the President of the CEPS pricing committee, Noël Renaudin, outlined the committee’s ongoing medicines policy: contain the growth in pharmaceutical expenditure and redirect spending towards more necessary or innovative drugs; reduce expenditure in several drug classes (antibiotics, hypnotics and sedatives), as well as other medicines with ‘insufficient’ medical benefit; decrease by 40-60% the price of generics for which prices have been maintained at a high level; introduce a second wave of reference pricing (TFR): generic penetration were analyzed from September to November 2004 and new generic groups subject to reference pricing will be published in 2005; modify the reference pricing system in order to ‘preserve the generics drive’; reduce the prices of ‘older’ medicines: for innovative medicines. The price will be reduced after the 5 years during which the price is currently guaranteed at a European level under the Accord Cadre, whereas drugs without an improvement in medical benefit will have their prices reduced earlier. Negotiations will take place on an individual product and manufacturer basis. The expected savings amount to €350 million;

Medicines sold to out-patients by hospital pharmacies, and later invoiced to the health insurers, are known as rétrocession drugs. The final version of the rétrocession list, containing 455 drug preparations permitted to be dispensed to out-patients by hospital pharmacies and charged to the ambulatory sector, was published in the Journal Officiel in December 2004. The reimbursement conditions and prices (the latter of which are subject to the CEPS-LEEM hospital accord) of most of the 455 products were also published. ‘Costly’ drugs are 100% reimbursed, whereas the others are reimbursed at 65%.

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The pricing committee (Comité économique des produits de santé, CEPS) reportedly rejected over half the pricing proposals by manufacturers for drugs on the rétrocession list. The rejections were mostly made on account of the proposed prices exceeding the highest price in Europe or because volumes were higher than expected.

Making a clear distinction between older drugs and new innovative drugs is a positive move for the pharmaceutical industry and is a change in direction for France, which has traditionally been a highly price regulated. The new regulations for innovative drugs will provide pharmaceutical companies with greater freedom over, thus helping companies achieve an adequate return on investment. The French market is highly influential with respect to international price comparisons. Low prices in France have often been used to justify low launch prices and subsequent post-launch price cuts in other countries. Therefore, an increased price for innovative products in the French market will have a positive impact on price levels across the rest of Europe.

Germany Germany’s statutory healthcare system covers 90% of the population and is financed by payroll and general taxes (80%) coupled with a contribution (20%) from private insurance and patient co-payments.

The state health system covers approximately 80% of prescription drug costs. In general, the reimbursement rate for most prescription pharmaceuticals runs at 100%. Patients typically pay a small fee per dispensed pack of between four to five euros. For some products, patients have to pay the difference between a fixed price (Festbetrag) set by the government and the actual price. However, pharmaceutical companies tend to set prices below this level.

Historically, the pharmaceutical industry has enjoyed a relatively free pricing system in Germany leading to some of the highest pharmaceutical prices outside of the US. A reference system has been in place since 1989, and primarily covers older genericized drugs. The German association responsible for setting the reference prices, the Federal

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Committee of Physicians and Sickness Insurance Funds (BAK) considers the following factors when deciding on a pricing reference group: whether the indication for a product is actually a disease; whether the disease must be treated by the Statutory Health Insurance Scheme (GKV); if the disease is to be treated under the GKV, whether there already are drugs available to do this; whether the disease can be treated equally well with simple, non-pharmacological methods; how the cost-effectiveness of the different options compare.

Recent developments… In early 2001, the German Health Minister abolished centrally-controlled limits on pharmaceutical expenditure and initiated a package, finally passed in 2002, encouraging the greater use of low-cost generics and mandating pharmacists to substitute a drug with a similar cheaper drug if it falls outside a specified price range. A number of additional schemes, aimed at cutting pharmaceutical expenditures, were implemented in January 2003. Among these measures included: compulsory price cuts forcing pharmaceutical companies to pay a 6% rebate on all medicines with unregulated prices. This was intended to run for one year and expected to save around €240m; a 3% rebate paid by pharmaceutical wholesalers on the retail price of medicines sold to pharmacies that are covered under the public healthcare insurance system; a cap on the price of generic drugs; a new ‘positive list’ for reimbursable products, to be introduced in 2003.

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In March 2003, the German Chancellor announced plans to modernize the social health system stating that the current health insurance fund system must be simplified and improved with competition expected to play a significant role. Competition implies private healthcare insurance and it seems likely that the government will seek to encourage enrollment in private schemes in order to lighten the load placed on the statutory system.

The German health system operates a ‘negative list’, which contains a small number of pharmaceuticals that are not eligible for reimbursement. Most recently, legislation has made headway in moving towards the introduction of a ‘positive list’ of drugs that are eligible for reimbursement, replacing the current ‘negative list’ system. It is estimated that the introduction of such a list would cut the number of drugs eligible for reimbursement by as much as 50%.

At the end of 2004, the Gemeinsamer Bundesausschuss (G-BA) confirmed its objective to generate savings in 2005 of €1,000 million from changes to the reference pricing system. The downward revision of existing reference prices earlier in 2004 has already resulted in savings of €300 million, and should save €400 million in 2005. Further reference price savings in 2005 are expected from: the inclusion of proton pump inhibitors, sartans, triptans and statins – collectively accounting for sales of €2,100 million – from 1 January 2005; including fluorchinolones, macrolides, serotonin-5-HT3-antagonists and triazolederivatives – with sales of €330 million – from 1 April 2005 at the earliest; the inclusion of antianaemics, coxibs and low molecular heparins and unfractionated heparin with combined sales of €740 million. A hearing on the formation of these groups was initiated by the G-BA at the beginning of September, and the reference prices would come into effect on 1 April 2005;

At the start of 2005, Pfizer filed a complaint with the Social Court in Berlin against the inclusion of Sortis (atorvastatin), marketed elsewhere as Lipitor, in the reference price 106

system. The complaint is directed at the Spitzenverbände der Krankenkassen (association of sickfunds, SK), which manages the reference pricing system. Meanwhile, Altana Pharma recently confirmed that it has also filed a complaint with the Social Court in Berlin, contesting the inclusion of its proton pump inhibitor Pantozol (pantoprazol).

While short-term cost-containment measures have severely impacted drug prices, in the longer-term the German government is aware that its problems are not limited to prescription drug prices. Therefore, it is seeking wider and more fundamental healthcare reform. Much uncertainly exists over the nature and extent of reforms across Germany’s healthcare system, making visibility on the impact of reform on pricing and reimbursement poor. However, it is becoming increasingly evident that the pharmaceutical industry will be a major target in the government’s attempt to reduce healthcare costs.

German pricing is particularly influential in the context of international reference pricing systems and the continued price cuts and uptake of internal reference pricing will impact on pricing and reimbursement throughout other foreign markets.

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Italy The pricing of drugs in Italy is controlled through the Central Pricing Agency (Comitato Interministeriale per la Programmazione Economica, CIPE). For new drugs, pricing negotiations take into account a number of factors, including: the degree of innovation; the product’s price in other countries; sales estimates; epidemiology; the target population for the drug; the number of patients expected to take the drug; comparator products; relationship to other therapies; improvements in quality of life; any available pharmacoeconomic data.

Within the Italian reimbursement system, prices are set using the average European price as a guide for each product. Prices are set according to the average for equivalent products in 12 EU benchmark countries, of which at least four are mandatory and two have to be price controlled. Failure by manufacturers to bring the price of a product in line with the European average results in an immediate delisting from the fully reimbursed Class A to the non-reimbursed Class C.

Prescription pharmaceuticals are grouped into four reimbursement categories:

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Category A – Fully reimbursed and including drugs for chronic diseases. Patients often have to pay a fixed price depending on the number and type of items prescribed; Category B – Partially reimbursed and including “important” drugs not covered by category “A”. For these 50% of the price is reimbursed by the state (this category was removed in January 2003); Category C – Non-reimbursed products and manufactures are free to set prices for this category; Category H – Hospital only drugs.

The assignment of a product to a reimbursement category is based on the importance of the disease, the drug’s risk-benefit profile (safety versus efficacy) and the cost of therapy. While economic evaluations are formally required for the negotiation of prices, reimbursement decisions look only at the cost of therapy in relation to the national drug expenditure budget.

The Italian Group for Pharmacoeconomic Studies (GISF) provides guidelines for use in agreeing prices for products approved through the EU centralized and mutual recognition procedures. Apart from these guidelines, CIPE regulations detail the pharmacoeconomic methodology to be used to derive the required cost-effectiveness data for submissions. These studies are particularly important for innovative products in new classes, or in classes where existing therapies are not adequate or where the product is claimed to have a better cost-benefit profile than products available for the same indication.

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Recent developments… In 1994, the Italian government introduced a ceiling on annual public pharmaceutical expenditure. Since its introduction, budgets have always been exceeded. Over the last few years, the Italian government has undertaken a range of measures to reduce pharmaceutical expenditure including price cuts.

In January 2003, a new reimbursement scheme aimed at reducing drug costs by a further $700m came into effect as part of the Italian government’s aims to make resources available for providing access to innovative drugs and orphan drugs. The scheme reclassified reimbursement categories and introduced price caps based on drug class. The scheme eliminated B category drugs leaving only the fully reimbursed A category and the non-reimbursed C category. However, Italy’s regions were given autonomy to use patient co-payments where it was deemed necessary, dependent upon each state’s fiscal health.

Companies with drugs that are more expensive than allowed by price caps are forced to either lower prices and receive full reimbursement status in category A, or see their products assigned to the C category. Needless to say, faced with this option the vast majority of companies have opted to lower prices and receive reimbursement rather than severely restrict market access to their products.

Italy has faced strong international pressure over its cost-containment measures. At the end of 2002, complaints were filed by US drug companies and the European Federation of Pharmaceutical Industries and Associations (EFPIA) relating to Italy’s pricing and reimbursement system. The EFPIA called for Italy to be charged with failure to comply with EU law requiring transparency in what it believes is an arbitrary and obscure pricing and reimbursement process. The EFPIA also criticized the “lack of direction and predictability” of Italian policy and the “disproportionate” number and extent of measures taken on other aspects of the healthcare budget. The EFPIA hopes that this will force Italy to change provisions and comply with its obligations under EU law.

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In December 2002, legislation to extend regional control over healthcare was approved. However, the process of decentralization faces opposition from the political center-left as they argue that it will create inequalities between the rich North and poor South. Currently the regions have powers to impose patient co-payments and a number of states have made co-payment changes and have reduced the number of products eligible for reimbursement.

In January 2005, the Italian Medicines Agency (AIFI) implemented a revised reimbursement list (Prontuario). The list included “selective” price reductions of up to 10% for a number of older patented active ingredients. The revision was carried out in light of a ministerial forecast of a budget deficit of €1,277 million for public pharmaceutical expenditure in 2004. AIFA’s key objectives in revising the reimbursement list were to: facilitate more efficient re-distribution of available resources within homogeneous drug categories, in order to cut costs; widen access to reimbursement by increasing the range of new drugs.

In comparison to the 2003 Prontuario, the 2005 version includes 43 new patent protected active ingredients and generic versions of 15 additional active ingredients for which patent protection has now expired. No drugs have been delisted. AIFA is also keen to emphasize that 36 active ingredients (13 patent protected and 23 generics) were granted market access in November and December 2004 and are included in the list, an indication of the accelerated marketing authorization process since AIFA took over responsibility.

In addition to the revised reimbursement list (Prontuario), the AIFA board of directors also approved adjustments to the price discounts on all reimbursable products (class A), with the exception of generics. These price discounts would be imposed on the industry in the form of payback arrangements. For the time being, the net discounts (which are adjustable depending on the pharma expenditure trend) will be increased

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from 4.12% to 4.43%, and extended through to September 2005 as part of the planned 2005 payback arrangements.

While the Italian market has suffered from a cost-containment drive over the last 2-3 years, it would appear as though measures are emerging as a success in terms of reducing costs. The introduction of the new reimbursement scheme should continue to reduce costs.

An increased level of dialogue and communication between the pharmaceutical industry and the Italian government, coupled with the apparent success achieved in cost containment may reduce the pressure on the pharmaceutical industry in the short term. It should also provide the industry with increased visibility and forewarning on future changes to pricing and reimbursement.

The changes to pricing and reimbursement in Italy will inevitably have repercussions for the wider pharmaceutical market. A number of countries use prices in the Italian market either directly or via EU referencing as a component in their pricing and reimbursement decisions. Those countries that reference Italy directly include Canada, France and Portugal.

If decentralization is implemented quickly, and regions achieve greater control over healthcare spending, the pharmaceutical industry in Italy could face similar issues to those being faced in Spain: fragmentation of the market with respect to pricing and reimbursement policy.

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Spain Spanish pharmaceutical prices are set by the Interministerial Commission of Pharmaceutical Prices. Spain operates a ‘cost plus’ pricing system where maximum drug prices are based on the costs incurred by the drug’s manufacturer (R&D, manufacturing and marketing and administration) plus a premium. The maximum return on each product is limited to between 12% and 18% over capital employed with the exact percentage determined by level of innovation and the availability of therapeutic equivalents and their prices. In addition, European price comparisons and the potential volume and value of sales are also taken into account. Tight control of pricing has traditionally kept Spanish prices well below those prevailing in other major European markets.

Reimbursement decisions are undertaken by the National Committee for Rational Use of Medicines and are largely based upon the following factors: importance of the disease; priorities of different population groups; therapeutic and social utility of the drug; budget limitations; availability of similar or better alternatives at a lower price or lower treatment cost.

The Spanish reimbursement system uses three different reimbursement levels: drugs in class R include chronic diseases, such as diabetes, hypertension, HIV or depression, which are reimbursed at a level of 90%; drugs in group N are reimbursed to a level of 60%; remaining drugs are not reimbursed at all.

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Retired people receive all drugs in groups R and N free of charge. However, in 2001 the Health Minister, Celia Villalobos, re-opened a debate looking at reviewing reimbursement for the elderly. The government considered changing the current system so that pensioners would pay 10% of the price of medicines, with the other 90% being reimbursed by the state. This would be used as a ‘deterrent measure’ to combat fraud and over purchasing.

During the late 1990s, Spain’s healthcare and pharmaceutical policy has been concerned primarily with cost containment. In recent years Spain has experienced an annual growth in public prescription drug spending in the order of 10% and there is concern that the public reimbursement system, which is regarded as one of the most generous in Europe, is unsustainable. Spain has traditionally used a wide range of unconnected pharmaceutical policies influencing the supplier side of the market in order to drive its cost-containment efforts. These include: negative lists of excluded drugs; rebates; reference pricing (introduced December 2000); price cuts; pharmacy discounts; encouragement of generic substitution; international price comparisons.

Historically, the system has had little positive impact on prescription drug spend and has been criticized for being unfocused and ultimately exhibiting a lack of control.

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Recent developments… In January 2002, a “Pact for Stability and Innovation” agreed between the pharmaceutical industry and the Spanish government came into effect. The objectives of the pact are broadly two-fold, on one hand it is designed to stabilize public pharmaceutical spending and the use of medicines, and on the other to ensure that the Spanish pharmaceutical industry remains globally competitive. Importantly, the objective of stability refers both to the healthcare system, particularly the viability of public spending on pharmaceuticals, and to the regulatory framework for the pharmaceutical sector. Key details of the agreement include: a commitment to increase R&D investment faster than GDP growth to reach a minimum of €1,352m between 2002 and 2004; one third of outlay earmarked to fund programs above and beyond research activities conducted by the pharmaceutical companies themselves (e.g. in hospitals, research institutes and other institutions); balanced development of generic and reference pricing systems; a contribution of between €150m and €300m from the pharmaceutical industry to fund flagship projects, for example in the fields of oncology, cardiovascular illness and genomics, which is to be managed by the National Health System; a contribution of €1 billion to public savings over a term of three years.

This partnership between industry and government provided the pharmaceutical industry with an opportunity to play a more significant role in Spain’s cost-containment initiatives, thereby providing enhanced visibility on policy changes and increasing the industry’s influence on policy.

The devolution of responsibility for healthcare management from the national to the regional level has been the key issue facing the Spanish pharmaceutical industry over the last 2-3 years. Prior to 2002, there was a mix between national and regional healthcare funding. Only 7 of the 17 autonomous communities had devolved 115

responsibilities (Andalusia, Basque Country, Canaries, Catalonia, Galicia, Navarra, Valencia) with the remaining administered centrally through Insalud (the national health service). However, in January 2002, all autonomous communities were handed devolved responsibility for providing and administering healthcare resources. Each region is now able to formulate its own budgets financed through regional taxation and allocate funds to healthcare with little intervention by central government. Ultimately, regional parliaments now play a significant role in setting prescription policy.

Central health authorities still control licensing, pricing and reimbursement decisions. However, some regions have begun to manage aspects of prescription and have put in place their own guidelines. Given that the regions take on the financial burden of centralized policy it seems likely that the regional authorities will take a wider role in policy decisions in the future.

The speed at which devolution has been implemented has left some areas without agreement on healthcare finances and regulations. As a consequence, devolution has led to some regions setting their own standards for cost-containment. These include: Extremadura has initiated its own cost-containment roadmap, which includes price caps (March 2003); Andalusia continues to fund drugs that are not covered by the national inventory (i.e. those that have been de-listed by the government); Madrid became the third Autonomous Community to set maximum prices on reimbursed pharmaceuticals (November 2002).

Devolution has led to variations in pricing and reimbursement practices across the 17 regions. For example, Andalusia has developed a different reference pricing system to that used at the national level. At the national level, reference pricing only affects the 2 top-selling products on the market, while the Andalusia system has coverage of the top 10. The Andalusian system applies the same reference price to all similar products, thereby enabling wider coverage than is achieved at the national level. The price is then 116

set at the higher of the two lower-priced products for each active ingredient. Using this system, the average reference price used in Andalusia is significantly lower than the national level. Other cost-containment policies being introduced on a regional basis include: educational campaigns targeting GPs; approval committees for some expensive products; monitoring the use of newly launched products.

The regional cost-containment drive is being further reinforced at the national level and in 2002 the Minister for Health published a plan to curtail public spending on prescription drugs. The plan encourages: generic substitution; re-evaluation of reimbursement criteria with emphasis on the use of pharmacoeconomics; increased pharmacovigilence.

In addition to measures being undertaken by individual regions, decentralization has led to regions forming procurement alliances in order to achieve enhanced buyer power. One such deal was struck in 2002 by the four central-western provinces.

Lower reimbursement prices than those in place at the national level have been introduced in recent years in 4 of the 17 autonomous regions (Andalucia, Extrmadura, Aragon and Castilla-La Mancha) to contain pharmaceutical expenditure. With the exception of Andalucia, these maximum price schemes are now only applied to drug presentations not affected by national reference price levels.

In other regions, dispensing recommendations are included in almost all the agreements signed by the regional health services and their council of pharmacists, although no 117

maximum prices are regulated. In line with this, generic substitution by pharmacists when prescriptions are written by active ingredient is also promoted.

Some accords are no more than verbal agreements; others include more specific regulations. In Madrid, for example, pharmacists are committed to dispense one of three cheapest generics for prescriptions by active ingredient if drugs are not affected by national reference prices.

At the end of 2004, the Spanish Health Minister announced a new set of price cuts. With the reference price system frozen pending a major overhaul, price cuts on nonreference priced drugs will be employed in the intervening years to curtail spending. As well as drugs covered by the reference price system, those with ex-manufacturer selling prices at or below €2 are also excluded from the price cuts, the latter concession resulting from industry pressure. The prices of affected drugs will not be allowed to fall below €2 once the discounts have been applied.

Manufacturers will market drugs at the new price levels from 1 February 2005. In order to avoid supply shortages, the old and reduced price packs co-existed until 28 February 2005. Wholesalers and pharmacists have the option of returning any remaining stock to the manufacturers at no cost to themselves from 1 March 2005. The same timelines will be observed in 2006: from February 2006, 2% price cuts will take effect and until 28 February 2006 old and new prices will co-exist.

The Ministry of Health has declared on several occasions that the reference price system introduced by the previous administration in January 2004 has failed to live up to expectations. Considered as “arbitrary and inefficient”, the government wants to draw up an alternative scheme, probably by 2007, that above all generates savings for the National Health System (Sistema Bacional de Salud, SNS). This could signal the introduction of therapeutic reference pricing in Spain (including patented drugs and grouping patented drugs with generics).

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The reference pricing legislation dictates that the creation of new reference groups to take account of patent expiries and the marketing of new generics, as well as the revision of existing reference prices, must take place on an annual basis. The decree approved at the close of 2004 modifies this to allow revisions every three years, with the purpose of giving the government sufficient time to design a new reference pricing system. In the meantime, both the drug presentations affected by the current system and their reference prices will remain the same.

As regional autonomy grows, so too does the role of the regions in cost containment, thereby adding a new level of players in the pricing and reimbursement environment. This is likely to result in increased diversity and variation in cost-containment measures and ultimately market fragmentation. Developments in Spain will influence thinking in other countries seeking greater decentralization, primarily Italy and Portugal. Spain’s Stability Pact between Farmaindustria and the Spanish government, may also be used as a model by other European nations.

As with many of the other major pharmaceutical markets, in the face of rising pharmaceutical expenditure the Spanish government is seeking to place greater emphasis on the role of economic evaluation in reimbursement decision-making processes.

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The UK The National Health Service (NHS) is a statutory health system with total coverage of UK residents. The Department of Health (DoH), overseen by the Secretary of State for Health, is responsible for health services in the UK.

The majority of drugs sold in the UK are reimbursed under the NHS at a price determined by the manufacturer. However, while the UK operates a system relatively free of direct price controls, prices of prescription drugs are controlled in an indirect manner by the Pharmaceutical Price Regulation Scheme (PPRS). The scheme represents an agreement between government and the pharmaceutical industry that controls the profit that pharmaceutical companies are able to make through their trading with the NHS. The explicit aim of the scheme has been to balance the conflicting needs of the NHS with the needs of the research-based pharmaceutical industry.

Drugs prescribed on the NHS are fully reimbursed with the exception of a fixed patient charge per prescription item. The names of drugs that cannot be prescribed on the NHS are kept on the limited list, which has been extended periodically since its introduction.

Recent developments… With the introduction of the National Institute of Clinical Excellence (NICE) in April 1999, drugs are now not only evaluated with regards to their clinical effectiveness, but also their cost-effectiveness. NICE’s recommendations play an important role in deciding whether drugs should be reimbursed. The main functions of NICE are: to appraise new and existing health technologies and products with the aim of providing guidance to physicians as to how and under what circumstances the assessed therapies should be used. These appraisals focus on a specific intervention, drug or drug class;

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to develop clinical guidelines to advise physicians on treatment choices for specific medical conditions. These appraisals examine the overall treatment of a disease.

As of March 2005, NICE had completed 88 technology appraisals, resulting in guidance for the use of a number of different therapies and interventions, with a further 54 appraisals in progress. NICE aims to increase the standardization of treatment across the UK. As therapies are not only judged on their clinical efficacy but also on their cost-effectiveness, the government intends that NICE will help speed the uptake of new, high value treatments throughout the UK’s health service. Consequently, healthcare spend is expected to be reduced, while patients are protected from receiving out-dated or inefficient treatment.

The current Labour government has been clear that it sees evidence-based medicine as playing a key role in the NHS and in meeting its pledges to raise the standard of healthcare provision in the UK. Since establishment, NICE’s work program has grown and its autonomy has been increased by the government. As a result, it seems likely that NICE will play an increasingly important role in the UK’s healthcare system.

Even without full adoption of the NICE model by other countries, NICE guidance attracts publicity across the EU and has the ability to influence pricing and reimbursement decisions. For example, in the case of a product being appraised by NICE prior to launch, guidance from NICE may be made available before the product has gained marketing approval in other countries: information likely to be taken into consideration by authorities in these markets. Authorities, payors and leading physicians, in other countries trust NICE and are likely to be influenced by the decisions it reaches. Therefore, pharmaceutical manufacturers who are directly affected by NICE need to take into consideration the fact those NICE decisions can potentially have ramifications across the EU as a whole.

In January 2005, a revised 5-year PPRS came into force. The new PPRS restricts the profit (or return on capital) that manufacturers can make on sales of medicines to the

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NHS to 21% of a company’s total NHS sales. The headline news was a 7% price cut on the NHS list price of all PPRS-covered medicines from 1 January 2005. However, as a five-year deal it was considered to offer the industry some degree of stability for ongoing R&D investments.

Aside from the price cut, the biggest change to the PPRS agreement is the allowances that companies can claim against their sales to the NHS, which have been modernized to reflect recent changes to the structure of the NHS. The R&D allowance has been raised to a maximum of 28% under the new PPRS, compared with 23% under the old agreement. The R&D allowance is seen as a way of countering the price cut and helping to promote a strong R&D-based industry in the UK.

According to the Association of the British Pharmaceutical Industry (ABPI), the benefits of the scheme include: the continued freedom of individual medicines pricing within the PPRS’s overall constraints; the stability it brings for at least the next five years; the right to modulate price cuts, rather than apply a flat 7% reduction across all products; the continued recognition and support provided for R&D investment.

Pharmacoeconomics in Europe Economic evaluation is increasingly being used by decision-makers as part of the pricing and reimbursement process. Most of the major pharmaceutical markets now either require mandatory submission of economic evaluations by pharmaceutical companies or will use economic evaluations to some degree in decision-making. Adoption has occurred rapidly over the past five years and there is a shift towards the

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adoption of mandatory requirements. Table 3.5 details countries in which economic assessment is employed in pricing and reimbursement decision-making. Table 3.5: Use of economic evaluations in different European countries Country

Belgium Denmark Finland France Germany Greece Hungary Italy Netherlands Norway Poland Portugal Slovenia Spain Sweden Switzerland UK

Official requirement for submission of economic evaluations

Under preparation or increasing in importance

× × × × × × × × × × × × × × × × England and Wales (NICE) Business Insights

Source: Author’s research and analysis

France In addition to the technical dossier submitted to the Transparency Commission, the drug’s manufacturer must submit a separate dossier to the Economic Committee for Health Products (ECHP) containing information about any economic evaluations that have been carried out and about comparisons of cost with other products. As part of its assessment, the ECHP may consult with an advisory group of experts in pharmacoeconomics. The ECHP will then engage in negotiations with manufacturers, which ultimately result in an agreement over the product’s pricing. In recent years, the French authorities have sought to increase the role of economic evaluations in the pricing and reimbursement of new drugs. While the submission on economic evaluations is not mandatory, pharmaceutical companies are advised that it is

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good practice to submit economic data and as such economic evaluations are a regular component of submissions.

Germany The restricted role of pharmacoeconomics in pricing and reimbursement decisions in Germany is a direct result of the current healthcare structure and the lack of perceived relevance of pharmacoeconomic studies to the German setting. Criticism is aimed at pharmacoeconomic studies from a number of sources, explaining why economic evaluation has played no formal role in decision-making in medical care in Germany. Such criticisms include: a lack of credibility in the results if studies are funded by pharmaceutical companies; a concern over the methodological shortcomings of the evaluation process, especially regarding techniques for measuring indirect costs and benefits; the difficulty of redistributing budgets between the hospital and office-based settings, since both have very powerful lobbies; the fact that health policy is more concerned with macroeconomic distribution policies than with micro-efficiency issues.

Due to the reference pricing system favored in Germany, it is possible that pharmacoeconomics may play a minor role in the integrated process of evaluating a new high cost drug, although this is not explicitly acknowledged by the pricing authority. The German healthcare system is comparatively wealthy and the pharmaceutical market, by European standards, is relatively uncontrolled. This means that companies with new high cost drugs often attempt to launch them in Germany as one of their first markets. If an innovative compound that addresses an unmet need is launched in Germany first, then the authorities cannot use the reference pricing system. In this case, pharmaceutical companies are usually free to set their ‘ideal’ price. Companies have to keep in mind, however, that physicians are given full responsibility

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for their budgets and may, therefore, be reluctant to prescribe such drugs on a regular basis. In future it is, therefore, likely that regulatory authorities, payors and physicians will use pharmacoeconomic data to assess the price and overall cost of a novel drug.

Italy In March 1999, the newly formed Italian Group for Pharmacoeconomic Studies (GISF) released a basic document of guidelines for use in agreeing prices for products approved through the EU centralized and mutual recognition procedures. Since the beginning of 1997, the reimbursement prices of new products approved through the centralized procedure have been negotiated by pharmaceutical companies and the government under regulations issued by the Italian Economic Planning Committee (CIPE). This system was later extended to cover products approved through the mutual recognition procedure.

As part of the negotiations with the Italian government, companies are required to produce data on incremental cost-effectiveness, the product’s prices outside Italy, future sales estimates for the Italian market and possible effects for the national economy resulting from the introduction of the new drug. Apart from these guidelines, the CIPE regulations do not give many details of the pharmacoeconomic methodology to be used to derive the required cost-effectiveness data or of the studies pharmaceutical companies need to submit.

The preliminary recommendations by the GISF for carrying out pharmacoeconomic studies suggest the preferred use of cost-effectiveness and cost-utility analyses. A society perspective and economic data that are directly relevant to the Italian healthcare environment should also be presented. Further recommendations cover the methodologies for, amongst other areas, statistical analysis and data presentation, which are relatively general in nature.

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Spain In Spain, there are no formal requirements for the submission of pharmacoeconomic data in the pricing and reimbursement procedure. There are a number of reasons for this, including: a higher priority is given to cost containment issues than efficiency criteria; traditionally, price control has been the main tool for pharmaceutical cost containment; there has traditionally been a reliance on the cost of production and reference price systems (based on price comparisons from low price countries) in setting prices for drugs.

The lack of integration of pharmacoeconomics into the pharmaceutical resource allocation process permeates all levels of healthcare in Spain. The recently introduced reference pricing system, which is based on the cheapest products within a particular therapeutic market, means that there is little incentive to identify efficient treatments, and this can explain the lack of pharmacoeconomics in the decision-making process.

It is likely that there will be an increase in the uptake and demand for pharmacoeconomics over the coming years. The introduction of managed competition in the form of discounted packages to hospitals from manufacturers means that contracts will have to be won by providers. For the first time, there will be an incentive to offer a clinically effective package of care that is cost efficient. This will ensure that health authorities begin to explore the impact that pharmacoeconomics can play in their coverage decisions. Within the hospital care market, the Spanish National Health Institute, Insalud, is already encouraged to consider cost-effectiveness data in decisions regarding formulary listings. Moreover, as cost containment pressures increase over the next years, the government will be forced to become more explicit about the role of pharmacoeconomics in the reimbursement system.

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UK The National Institute for Clinical Excellence (NICE) was officially established in the UK in April 1999. NICE is a Special Health Authority covering England and Wales, whose role is to produce and disseminate clinical guidelines, both for medicines and medical technologies. The main functions of NICE are: to appraise new and existing health technologies and products with the aim of providing guidance to physicians as to how and under what circumstances the assessed therapies should be used; to develop clinical guidelines to advise physicians on treatment choices for specific medical conditions. These appraisals examine the overall treatment of a disease.

The aim of NICE is to increase the standardization of treatment across the UK. Currently, patients in some areas of the UK do not receive treatments and drugs that are available to patients whose treatment is being funded by a different local health authority. NICE is intended to eliminate such regional variation by identifying optimal treatment practices. However, therapies are not just judged on their clinical efficacy but also on their cost-effectiveness. The government intends that NICE will help speed the uptake of new, good value treatments throughout the UK’s health service and will, therefore, protect patients from receiving out-dated or inefficient treatment and reduce healthcare spend.

To ensure the implementation of NICE guidelines, a sister organization, the Commission for Health Improvement (CHIMP), has been established to ensure that the guidelines issued by NICE are adhered to. CHIMP has powers to monitor the services provided by the UK national health organization and will be visiting physicians and hospitals to check that they are acting in accordance with NICE recommendations. NICE insists that physicians will not lose their control of the treatment of individual patients and that they will still be able to contravene NICE recommendations if a different course of treatment is more appropriate for a particular patient. However,

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NICE will expect physicians who contravene issued guidelines to be able to justify their decision.

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Figure 3.12: The NICE appraisal cycle

CHIMP

Monotoring

Selection •intervention (new/existing) •disease/therapy area

•feedback •continuous review

Assessment •clin ical effectiveness •cost effectiveness

Appraisal and guidance

Implementation •clin ical governance

Dissemination

•implications for clin ical practice •issue guidance

•guidance •audit methodologies

NICE Business Insights

Source: Delphi Pharma

The appraisal cycle under NICE consists of the selection of either a new or existing treatment or a particular disease, assessment of clinical and cost effectiveness, appraisal and guidance, implementation and monitoring. This cycle will only apply to selected treatments or diseases and NICE will only act at the appraisal and dissemination stage, whilst CHIMP will ensure the monitoring of guidance implementations.

The pharmaceutical industry has not been as welcoming to the introduction of NICE as the medical profession. The Association of the British Pharmaceutical Industry (ABPI) has agreed that the objectives of NICE are important and laudable. However, it also claims that the mechanisms and processes proposed for appraisal and evaluation, and the dissemination of conclusions based on these appraisals, are potentially anti129

innovative, will damage the UK research base and will not achieve the intended objectives. The objections and concerns of the pharmaceutical industry focus around the following: the lack of industry participation in the decision-making process of NICE; potential delays to the launch of new drugs; potential delays to the uptake of new drugs; potential disincentives to bringing new medicines to the UK market at an early stage; the risk of denying patients access to new treatments which have been granted marketing approval; the lack of a system allowing companies to appeal against decisions made by NICE.

The main concern surrounding the creation of NICE is the potential for delaying the introduction of new products due to the lack of cost-effectiveness data if NICE has included the product in its appraisal program. To obtain pharmacoeconomic data, UK based pharmaceutical companies will have to conduct additional studies and, therefore, more time may need to be spent conducting trials before the launch of a new product to be appraised by NICE. This problem will, of course, only apply to NICE appraisals of products that have not been launched.

For products being appraised by NICE prior to their launch, there is also a possibility that the NICE evaluation will be published before the European Medicines Evaluation Agency (EMEA) or the UK licensing authority, the Medicines Control Agency (MCA), has granted marketing approval to a new product. This could lead to a situation in which NICE has decided that a product ought not to be used by physicians before the approval authorities have carried out a review of the scientific and medical data.

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For products that are appraised by NICE prior to their launch, pharmacoeconomic assessment

may

constitute

a

fourth

hurdle.

Similar

to

the

hurdle

that

pharmacoeconomics forms in Australia, presenting a barrier to reimbursement, pharmacoeconomic appraisal of a product in the UK, which is conducted prior to, or in tandem with, approval assessment could decide whether or not a drug is prescribed. In 1986, the UK government published the ‘limited list’, a negative list of drugs that cannot be reimbursed and must be paid for by the patient if they are prescribed. Most drugs that are prescribed by physicians are reimbursed in the UK, but a negative NICE assessment could limit physician prescription of a drug even if that drug is not on the negative

list.

Similarly,

a

product

that

is

considered

by

NICE

to

be

pharmacoeconomically beneficial for the UK health service is likely to experience quicker physician uptake and use due to the support of CHIMP.

Since January 2002, NICE guidance has been mandatory, that is to say that once guidelines are published the NHS has to provide funding for drugs and treatments approved by NICE and that healthcare professionals in the NHS are expected to take them into full consideration and abide by them when making treatment decisions. Therefore, NICE has huge significance with respect to the dynamics of the pharmaceutical market in the UK. NICE guidance can dictate how medical conditions are treated and plays a critical role in determining whether a technology should be made available on the NHS and therefore, by default its reimbursement status.

Parallel importing in Europe European Union rules governing the free movement of goods among member states and the existence of wide differentials in the pricing of pharmaceuticals provide an environment geared for parallel importing. Parallel trade of medicines already takes place on a large scale within the EU and represents a major problem for pharmaceutical manufacturers. It is estimated that parallel importing of drugs from EU countries with tight price controls (and consequently low prices), such as Spain, Greece and Portugal, to higher-price markets, such as the UK and Germany, costs the pharmaceutical 131

industry as much as €3.5 billion a year in lost profits according to the European Federation of Pharmaceutical Industries and Associations and is seen as one of the major barriers to European competitiveness.

The accession of eight CEE countries and Cyprus and Malta into the EU in May 2004 is likely to lead to an increase in price differentials across the region. There is, therefore, concern that once the eastern and western markets combine, a network of distributors will emerge to take advantage of price differences and parallel importing activity will escalate significantly.

Penetration of parallel imports A number of factors affect the penetration of parallel imports within different EU countries: the price differential between import and export market; government initiatives to encourage parallel importing; ability to obtain a license for parallel imports.

Price differentials… The penetration of parallel imports in different countries depends primarily on the price differential between the import market and its potential source market. Within Europe, certain countries typically have high prices for pharmaceuticals, while in others prices are set much lower. Although the prices charged partly reflect the economic wealth of the affected companies, almost all European governments operate some form of control over the pricing of pharmaceuticals. In some countries, such as Greece, control is direct, using references to the prices of products in other countries to ensure that products are at least as cheap in Greece as elsewhere and that new products are not substantially more expensive than older alternatives. In others, pricing control is more relaxed. In the UK, for example, prices are influenced indirectly by capping the

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profitability of pharmaceutical companies’ operations, while Denmark operates almost a free market in pharmaceuticals.

Initiatives to encourage use of parallel imports… The attitude of healthcare payors can weaken the relationship between price differentials and the penetration of parallel imports. Germany has, in the past, had a relatively relaxed attitude to spending on pharmaceuticals, so there was little incentive for pharmacists to stock cheaper parallel imports. In contrast, in the UK, where the government is clamping down on pharmaceutical spending, cheaper parallel imports are encouraged, as are generics. Thus, even though the UK is both cheaper than Germany and has a smaller market volume, its penetration by parallel importers is higher. In 2000, Germany reintroduced a law requiring pharmacists to substitute manufacturers’ directly bought products with parallel imports if they are at least 10% cheaper, and this has driven significant growth in the penetration of parallel imports in Germany.

Ability to obtain a license to import products… Another factor that affects the penetration of parallel imports is how easy it is for imports to gain a product license. An importer must be issued a license for each drug it wishes to import into a specific country. In certain countries, such as Germany, the delay in granting such licenses is known to be significantly longer than in other European countries, such as the UK and The Netherlands. Again, this is related to the attitude of the governments, as the healthcare payors, towards parallel imports. Countries with a more proactive approach to lowering healthcare costs are likely to prioritize granting such licenses more highly than those which do not value parallel imports as cost containment measures.

Regulations and key legal decisions In Europe, the principle of free movement of goods and services between the member states of the European Union (articles 30 and 36 of the Treaty of Rome) is key to the development of the parallel importing industry. It is supported by the European 133

Commission Trade Marks Directive of 1989, which supported the principle of international exhaustion of intellectual property, although only within the EU. These two regulations have been the drivers of the development of parallel trade within the EU. A number of legal cases have been important in determining the exact extent to which international exhaustion applies within Europe, and these are briefly outlined below.

Merck versus Stephar… In 1981, Merck took a Dutch parallel importer, Stephar, to court for importing one of Merck’s drugs from Italy to The Netherlands. Merck argued that Stephar was infringing its extant Dutch patent on the drug, even though the product was not patented in Italy, due to its more relaxed patent regulations. The court ruled that a patentee’s exclusive rights are exhausted once a product is marketed with its consent in an EU member state, even if that country does not grant patents.

Bayer (Adalat)… In 1991, Bayer made available only limited supplies of its anti-hypertensive Adalat in France and Spain, where it is sold at a much lower price point than in the UK, Germany, Holland and France. Although there is no legal compulsion on a company to meet all the demand within a specific market, in 1996 the EC Directorate General IV brought a case against Bayer for this action, saying that it was colluding with wholesalers to impose a barrier to trade. Bayer appealed against the decision in the European Court of Justice and, in October 2000, the Court found that Bayer had not been in contravention of the Treaty of Rome.

Bristol-Myers Squibb versus Paranova… In 1996, Bristol-Myers Squibb (BMS) brought a case before the European Court in which it sought to prevent Paranova from buying drugs in Greece and repackaging them for sale in Denmark. BMS claimed that repackaging amounted to Paranova applying its trademark without its permission. However, the Court decided that to prevent Paranova repackaging the product would be a barrier to free trade and, 134

therefore, that Paranova should be entitled to repackage where necessary to render the product usable in the destination market.

The Silhouette case… The Silhouette case is the classic demonstration of the limits of international exhaustion of intellectual property rights. The case was brought in 1996 by an Austrian company, Silhouette, against a retailer, Hartlauer. Hartlauer had purchased Silhouette sunglasses from a Bulgarian company, Union Trading, which had bought them at a discount from Silhouette in Austria. The European Court of Justice ruled that Silhouette could use its trademark rights to prevent Hartlauer from selling the sunglasses, because the principle of exhaustion applies only within the EEA, as the principle of free movement of goods is restricted to the EEA. This is in spite of the fact that Austria had previously applied the exhaustion principle internationally and, therefore, prior to this case the import would not have been considered to be infringing Silhouette’s trademark. Thus, the case demonstrated that: exhaustion of intellectual property rights applies within the EEA; individual countries of the EU are not free to apply the exhaustion principle internationally.

The Maglite case… The Maglite case of 1997 involved a Norwegian company (California Trading Company Norway) parallel importing torches carrying the brand Maglite from the US into Norway. The official Norwegian marketer of the product, Viking International Products, Oslo, was appointed by Mag Instruments, which sued the California Trading Company for breach of trademark and of the EU Trade Mark Directive. However, in 1997 the European Free Trade Association (EFTA) Court, in which the case was tried, determined that non-EU countries are not bound by the EU Trade Mark Directive and, therefore, can apply international exhaustion of intellectual property rights.

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The Davidoff case… In 1999, Zino Davidoff brought a case in the UK Courts against A&G Imports, which had imported Davidoff perfume from Singapore. A&G imports had removed the batch codes on the perfume during the import process. Davidoff argued that it would suffer damage if its perfume were sold in large batches at a low price, through erosion of its prestige and, therefore, that the importing was in breach of its trademark. However, the UK Court found that: the purpose of a trademark is not to give the trademark owner protection, but to guarantee the quality and source of a product to consumers; Davidoff had consented to the imports by implication because it had not indicated on the label where the perfume could be sold. Therefore, even though the import was sourced outside the EU, the import was still legal.

This case has significant implications for the parallel import industry, since the issue of implied consent is extremely important in determining legitimate sources of imports. However, the case has been referred to the European Court of Justice and there is no guarantee that the UK decision will be upheld.

Recent developments GSK’s supply restriction in Greece… In late 2004, the Advocate General of European Court of Justice (ECJ) ruled that a supply restriction scheme operated by GlaxoSmithKline (GSK) in Greece does not automatically constitute abuse of a dominant market position. The case involved GSK cutting off supplies to Greek wholesalers who were exporting the company’s products to other EU states. After initially opting to supply pharmacies and hospitals directly, GSK subsequently reinstated supplies to meet local demand. The Greek Competition Commission referred the case to the ECJ to establish whether, as a dominant company, GSK could refuse to supply wholesalers in order to curtail parallel trade.

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Advocate General Jacobs found that “a dominant company may be obliged to supply its products or services but that this only applies in exceptional circumstances.” In addition, “a dominant undertaking is not obliged to meet orders which are out of the ordinary and is entitled to take such steps as are reasonable in order to defend its commercial interests”. Jacobs also noted that normal conditions of competition do not prevail in the European pharmaceutical market because of the different price controls in place in each member state.

The Advocate General’s opinion marks a second victory for research-based companies over their parallel trade rivals, following the ECJ’s confirmation earlier in 2004 that Bayer’s supply management scheme for Adalat did not infringe community law. The ECJ’s final ruling on the GSK case will follow in 2005.

Lack of regulatory framework in France… In late 2004, the ECJ condemned France for not having a specific regulatory framework for the authorization of parallel imports from other EU countries. Following a complaint by a French manufacturer, the European Commission has transmitted its recommendations several times since January 2000. By June 2003, however, the necessary legislation had still not been created and the Commission took France to court.

Although a decree in line with EU recommendations was published in the Journal Officiel in January 2004, the Court condemned France because, by the deadline imposed, there were “no specific regulations in France relating to import authorization for medicines originating from other EU countries, when those are identical to drugs already authorized in France (parallel imports)”. France will be responsible for paying the court costs.

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Novo Nordisk’s supply of Actrapid Novolet in Spain… In late 2004, the Spanish Agency for Medicines and Health Products (Agencia Espanola del Medicamento y Productos Sanitarios, AEMPS) announced that it will issue a lawsuit against Novo Nordisk if the company fails to supply the market with adequate levels of its recombinant insulin, Actrapid Novolet. The official statement was made after the manufacturer communicated to the AEMPS that it would no longer be possible to maintain supplies, blaming parallel trade owing to the drug’s low price (€8.00).

A more expensive presentation (€15.00) from the same manufacturer, but with a different form of administration, was authorized in 2000. In line with this, Novo Nordisk announced in April 2004 it was ceasing production of the older version and requested the AEMPS to cancel its market authorization. The Ministry of Health rejected the petition on the grounds that continuity of patient treatment must be granted.

Pfizer’s direct distribution to pharmacies in Spain… From June 2005, Pfizer plan to begin direct distribution of its products to Spanish pharmacies, in a move designed to “fight the shortage of supplies caused by parallel exports”. The company has already communicated to wholesalers that orders will not be taken from this date, while pharmacists have been guaranteed the “same quality” of distribution service. “The only difference is that their drug demands will be supplied by the manufacturer without intermediaries,” said a Pfizer statement. The measure, backed by the Medicines Law, has not been welcomed by the Federation of Pharmaceutical Wholesalers (Fedifar), which has expressed its intention to continue negotiations with the company in order to reach a satisfactory agreement.

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Generic substitution in Europe The EU introduced patent legislation in 1993, allowing for supplementary patent certificates (SPCs) to be obtained for the active ingredients of medicinal products. This is a system similar to the Waxman-Hatch Act in the US, intended to compensate patent holders for time lost during the regulatory review process. The duration of the minimum marketing exclusivity term for a patented pharmaceutical product under the SPC is the time elapsed between filing for the patent and receiving marketing authorization, minus five years.

As the SPC certificate may not exceed five years in duration, it essentially ensures that a product receives up to five years additional marketing exclusivity, providing the patent term expires immediately following the granting of marketing authorization. More importantly, it ensures that the majority of products, namely those that take between five and 10 years to proceed from the patent filing stage to receiving marketing authorization, receive identical market exclusivity periods of 15 years.

SPCs must be applied for separately at each of the different national European patent offices, which means that a large number of applications are required to obtain an extension in each of the European markets in which a product is available. The SPCs should be identical, although they are still granted on a national basis. There are, however, a number of reasons why SPCs do not provide equivalent protection throughout Europe with respect to the total term of marketing exclusivity and the date of SPC/patent expiry: national SPC regulation—in both France and Italy, for example, regulations allow for extensions to the original patent term beyond the EU-defined SPC; older 18 year patent terms in Germany—the term for patents filed prior to 1978 is 18 years rather than 20 years, a shortfall which is not compensated for by the EU SPC; 139

national patents—as the only patents available prior to the establishment of the European Patent Convention and the European Patent Office, national patents cause discrepancies in actual expiry dates; differences between national marketing authorization dates—as originator companies may have applied for marketing approval at different times in different countries, the reference dates required to calculate SPC term, patent filing date and date of marketing authorization can differ from market to market.

In the near future, European harmonization is expected to remove most, but not all, of the national differences in both marketing exclusivity terms and patent expiry.

For the generics industry, the fundamental impact of SPCs is an extension to the period between marketing authorization and the launch of the first generic. Unsurprisingly, generics manufacturers were very disappointed with this legislation, which differed from the US Waxman-Hatch legislation in that there was no Roche/Bolar clause for generics to offset the additional patent protection granted to the research-based industry. In Europe, the definition of patent infringement includes small-scale production required for the testing process integral to the development of a new generic product. Thus, the absence of a Roche/Bolar clause prevents generics manufacturers from using samples of the active ingredient of the protected drug in the country concerned while the patent or the SPC is still in term.

In some member states legislation has been introduced to address the lack of a Roche/Bolar clause. In the UK and Germany, the application to obtain marketing authorization for a generic product may be submitted without a sample of the product. Generics manufacturers are then allowed to conduct the testing and formulating process in another market outside the country in which the active ingredient is patent protected. Review of the documentation can occur prior to patent expiry without breaking EU patent law and, once patent expiry has occurred, a sample can be provided for the regulatory office, transported from the country in which the testing process has been conducted. This can substantially reduce the time lapse between patent expiry and

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generics launch. In fact, in Germany, generics have been launched the day following patent expiry. For example, generic captopril (affecting Bristol-Myers Squibb’s Lopirin) was launched in February 1995, after Spain was used as the site of product testing, thus taking advantage of the transition period granted to Spain for introducing adequate patent legislation following its entry into the EU. In other countries, such as France, the required documentation cannot be submitted for review without the simultaneous submission of a sample. This can cause delays of up to five years in the launch of generic competition following patent expiry.

The mutual recognition procedure While the mutual recognition procedure (MRP) was introduced with the aim of standardizing legislative requirements for new drug approval throughout the EU, it has not been particularly beneficial for generic drugs. In particular, differing interpretations among member states and the European Commission have caused problems in the practical use of the MRP. If a generic company wishes to register a generic medicine in more than one EU country, it must use the MRP.

Under the MRP scheme, EU countries are attempting to standardize the legislative requirements for clinical trials necessary to gain marketing approval, with the aim of allowing trials in one EU country to be used for EU wide product launches. The centralized procedure has been of benefit for manufacturers of branded originals, offering the potential for R&D cost savings and sales in a wider range of countries. However, the lack of recognition of generics companies’ reduced need for clinical trials to enable lower cost products means that interpretation of the MRP with respect to simplified generic approvals has been less beneficial. Therefore, the European Generics Association has identified several key difficulties in the implementation of MRP. These obstacles represent a significant limitation to generic manufacturers wishing to launch a new product in the EU, as they make the approval process long and complicated: under directive 65/65, approval of a generic is possible without extensive clinical trials if similarities to the reference product are shown. However, the requirement

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for six years of historic sales data for the reference product can be misinterpreted as meaning it must still be on the market; with no Roche/Bolar exemption allowing for early licensing and approval investigations before the branded product patent expires, approval of a generic is significantly delayed compared to the US and certain Eastern European countries; marketing exclusivity for the original is often extensive and varies between countries; both the reference product and the required degree of bioequivalence to the originator vary between member countries, making the development of uniform generic drug trials difficult; there is a lack of agreement on which factors are important in deciding whether a product represents a health risk and should be withdrawn or not authorized, rendering EU-wide policy-making difficult and creating a barrier to decision making for generic drug approval; MRP approval of generic products is only valid for the indications of the branded original that are common throughout the EU. Thus, even if one EU country allows more indications for a branded reference product, a generic that is approved Europe-wide will only receive approval for those indications that are valid throughout the EU.

Future changes in European generics legislation The expansion of EU members will cause standardization problems with respect to the degree of encouragement for generic pharmaceuticals that is enshrined in national legislation. Presently, the EU is against the adoption of a Roche/Bolar principle similar to that in the US, which would allow generic companies to start research prior to patent expiry and thus allow a generic drug to reach the market as early as possible. However, member states recently joining the EU (such as Poland and Hungary) have established different, country specific strategies. In particular, Poland has proposed changes to its patent law, making it legal to carry out research that is necessary to gain registration to 142

trade before patent expiry of the original product. This means that pharmaceutical products, including generics, can file for approval without infringing existing product patents. Hungary introduced similar Roche/Bolar-like exemptions in 2000.

Following a ruling by a disputes panel of the World Trade Organization (WTO) in mid2000, one of the last remaining hurdles to the adoption of Roche/Bolar provisions within the EU was overcome. The ruling resulted from a complaint lodged by the EU with the WTO about Roche/Bolar provisions in Canada, claiming that the provisions breached the TRIPS treaty. The WTO’s disputes panel focused on two clauses in Canada’s patent legislation. One clause states that work relating to “the development and submission of information” needed to comply with regulations on the sale of pharmaceuticals and other products is not a patent infringement. The other clause allows the storage of generic products in preparation for the expiry of patents on an original drug. The panel concluded that the first clause is consistent with TRIPS, but that the second, on the stockpiling of products up to six months before a patent’s expiry, is not in line with the TRIPS agreement.

Should the EU go ahead with the adoption of Roche/Bolar-like provisions, the largest winners are set to be the generics companies, which would be able to streamline generic testing and production prior to patent expiry. In addition, the European active pharmaceutical ingredient suppliers would see a significant boost to their businesses, which has been steadily eroded by manufacturers that are active in states with Roche/Bolar provisions, such as several of the Eastern European countries. Without the restrictions present in the EU, Central and Eastern Europe has become a center for the production of generics, rapidly supplying EU generics companies following patent expiry to minimize the delay before launch of generics. Should Roche/Bolar provisions be adopted within the EU, the working environment for generic companies would, therefore, be significantly improved.

In general, Western Europe is lagging behind the US in terms of generic drug regulations, having less legislation to encourage new generic product launches. Thus, European generics manufacturers could find it hard to compete with US generics 143

companies in terms of new generic product launches, as limited revenues will constrain R&D activity. The long-term expansion of European generics companies is likely to depend on changes in the legislation making the EU more favorable for generics companies and government programs encouraging increased generic substitution.

Government initiatives encouraging generic uptake Encouraging the substitution of generics over branded products has been a common theme of cost containment initiatives across Europe over the past two years and is a fundamental factor in relieving budgetary pressures. The majority of European countries have implemented strategies to promote the prescribing and dispensing of generics by physicians and pharmacists and increase customer awareness and acceptance of generics. Table 3.6: Generic substitution in across European countries Country Belgium Denmark Finland France Germany Greece Italy Ireland Netherlands Portugal Spain Sweden UK

Substitution allowed

Actively promoted/ mandated

No Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes

Yes Yes Yes Yes Yes Yes Yes Business Insights

Source: Author’s research and analysis

EU accession On 1 May 2004, 10 new countries joined the European Union (EU), thereby, increasing the member states from 15 to 25. The new accession countries include eight Central 144

and Eastern European (CEE) countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, and two Mediterranean islands: Malta and Cyprus. The expansion of the single market increases the population size from 379 million to 453 million, and will stimulate economic growth by providing new opportunities for businesses throughout Europe. A number of key factors have been identified as having the greatest impact post-accession, including: an expansive market is created once accession countries have harmonized their drug regulatory and intellectual property laws in line with EU legislation; consolidation of the CEE pharmaceutical market will occur as companies need to become more competitive and focused globally; financial pressures associated with healthcare reform in the accession countries will affect the availability and choice of drugs entering the market; reforming the drug pricing systems in accession countries to a reference pricing model, which is weighted towards generics, will add greater pressure to panEuropean pricing; pricing differentials between accession countries and the EU15 will escalate, thereby, fueling parallel trade from the new member states; European governments continue to implement generic substitution policies to cost contain their healthcare budgets, therefore, growth of the generics market will increase and be strengthened by the CEE pharmaceutical industry.

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Drug pricing policies and reimbursement post-accession With the EC striving towards greater accessibility of innovative medicines for member states, the pricing and reimbursement of new drugs will be key challenges facing the industry in the enlarged EU. Due to marked differences in the amount actually spent on healthcare between the EU15 and accession countries, new products entering accession markets may be unable to achieve high revenue streams. This would be a direct result of lower pricing and/or the possibility of non-reimbursement. Consequently, innovation (first-in-class therapies) appears to the main key to unlocking buy-in from EU pricing and reimbursement bodies in a cost contained environment.

There is significant concern within the pharmaceutical industry that the economic disparities between EU15 and accession countries will exacerbate market distortion across the enlarged EU. An escalation of price differentials between accession countries and current member states after EU enlargement is considered to be a major concern. Importantly, if downward pressure on drug pricing continues in the enlarged EU, its impact on the future of pan-European pricing strategies will affect the decisions made by companies to launch innovative drugs in these very markets.

Accession countries are currently initiating reform in their healthcare systems, which is to be modeled on the social insurance systems used in France and Germany. However, the majority of the healthcare systems are state funded and pharmaceutical products are price controlled. As a result, prices in accession countries are often 30–40% lower than the rest of the EU. This significant price differential gives rise to the concern that accession countries could lead to price erosion across the EU.

The majority of EU countries currently use international price comparisons as part of their pricing and reimbursement decision process. When undertaking price comparisons, the price of the drug is influenced by examining the price of the same drug in a number of ‘benchmark’ countries. For example, the UK, France, Germany, Italy and Spain are highly influential in the European price comparison arena.

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The expansion of the EU in May 2004 may encourage some current EU states to begin taking into account accession countries’ drug prices when assigning healthcare budgets. Greece, the Netherlands, Finland and Denmark currently use the EU average drug price as a component of their comparison methodologies. If these countries continue to use the EU average and lowest prices, this parameter will be influenced by drug prices set in accession countries. Even in situations where countries are not formally included in a price comparison basket, pricing data is often freely available to policy makers and may still be taken into account when drawing up pricing policies.

Parallel trade post-accession The accession of eight CEE countries along with Cyprus and Malta in 2004 is likely to lead to an increase of price differentials across the enlarged EU. There is a major industry concern that a network of distributors will emerge to take advantage of ensuing price differentials through parallel importing. Multinationals fear they will lose substantial revenues in the leading EU markets to parallel trade because of the expected increase in exportation of cheaper branded or generic products from CEE countries to higher priced EU markets.

From a legislative perspective, with respect to enlargement, the EU has done little to address the issue of parallel importing. Furthermore, the pharmaceutical industry has had little success in halting parallel importing. The industry has called for accession treaties to outlaw parallel importing from new EU members for a transition period of up to 15 years.

It remains to be seen if the pharmaceutical industry will succeed in securing protection from parallel trade. There is little political motivation in Europe to restrict parallel imports and the idea of halting such practices has been resisted on the grounds that this would contravene EU’s law of free movement. Additionally, most parallel trade comes from Greece, Portugal and Spain and upon accession to the EU - no transition period existed for these countries. The implementation of such a period for the 10 new EU members carries uncertain risks.

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Within the enlarged EU, the traditionally higher priced markets of Northern Europe will potentially be hit hardest by paralleling importing. In recent years, the UK accounted for the highest share of parallel importing due to its free-pricing system, followed by Denmark, Sweden, the Netherlands, and Germany. However, Germany will be the most vulnerable to post-accession parallel importing due to its geographical location and its recent government endorsement of cost containment policies to reduce overall healthcare budgets. Germany also shares borders with the Czech Republic and Poland, two of the largest CEE pharmaceutical markets.

A number of factors will determine the speed and degree to which EU enlargement will affect parallel trade: the eventual rate of economic convergence of accession countries with the EU will dictate the speed at which parallel trade emerges from new members; pricing differentials post-accession will dictate the opportunity for parallel importers. While significant pricing differentials already exist, it is likely that Western European manufacturers will seek to reduce differentials by increasing prices in accession markets; logistical considerations, for example, provision of adequate supplies of products, may be a limiting factor. Pharmaceutical companies may attempt to limit the supply of medicines to markets to meet domestic demand in an attempt to minimize surplus stock, which parallel importers can use for trade; the product portfolio will dictate the extent to which each company is affected by parallel trade. For example, a small number of blockbuster products, such as Pfizer’s dyslipidemic Lipitor (atorvastatin) and anti-arthritic Celebrex (celecoxib) and Merck’s dyslipidemic Zocor (simvastatin) account for around 50% of parallel trade in the EU.

It is likely that post-accession, pharmaceutical companies will raise prices of branded products in accession countries to bring them in line with the rest of Europe. While this

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strategy may curb parallel trade to some extent, parallel importers are still able to exploit price differentials as low as 10%. It is unlikely that the pricing and reimbursement policies of accession countries will permit prices to be raised sufficiently to keep price differentials below the 10% threshold.

In cases where prices cannot be increased sufficiently, companies will be forced to accept losses attributed to parallel trade and the gains associated with access to new markets. In cases where parallel import share has reached a significant level in high priced markets, pharmaceutical companies have been forced to reduce prices in such countries like the UK or Germany. Therefore, strategies to limit parallel trade across Europe may in themselves result in price erosion that could affect both the non- and actual parallel importation markets.

Generics post-accession Generics manufacturers tend to originate from markets with lower economic growth and are driven in part by supplying lower priced drugs that are deemed affordable by their domestic markets. Consequently, EU enlargement provides an advantage to exploit the growth of generics further with the inclusion of the CEE regions. Generic manufacturers in accession countries currently enjoy low pharmaceutical ingredient and production costs. If manufacturing costs remain low post-accession, it is possible that the enlarged EU will see a reduction in the overall price of generic products. The result will impact the industry as a whole, as it will bring down pan-European drug prices further, especially, with the growing practice of reference pricing.

Encouraging the substitution of generics over branded products has been a common theme for cost containment across Europe, and is a key factor driving the growth of generics usage. The introduction of lower priced generics from accession countries would provide increased incentives for Western European governments to implement additional measures that promote widespread generic substitution to reduce healthcare costs. This is best illustrated by Portugal and Sweden encouraging generic substitution by allowing patients to opt for branded drugs as long as they pay the differential cost.

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However, patients do opt for branded products if price differences are relatively small. A lowering of generic prices will encourage more patients to choose generics because of greater savings. In addition, the lowering of generic prices in Germany and Italy will also place more pressure on branded products, especially, when reference pricing systems are based on generic medicine prices.

Upon accession, generic drug manufacturers in the accession countries will be faced with the introduction of stricter EU regulations relating to manufacturing standards, data exclusivity provisions, supplementary protection certificates (SPCs), and the possible outlawing of generic development of drugs still under patent protection. This harmonization of EU legislations in the accession countries will be a limiting factor for ensuing growth.

Growth of the generics market post-accession will be influenced by 3 key regulatory factors: extending the exclusivity period of patented drugs: if the proposed changes by the EC are made to harmonize a 10-year data exclusivity period to all member states, this will reduce the availability of generic drugs for manufacturers to produce because of a time delay for the product to be launched into the market; accepting SPCs as part of national legislations: once accession countries accept the provisions of SPCs, patented drugs can have market exclusivity extended for a further 5 years, therefore, postponing the introduction of the generic drugs even further; abolishing the Bolar provision: outlawing development of drugs still under patent protection by generic manufacturers in the accession countries will affect product availability because of a delay for ‘time to market’ generics being available immediately after patent expiry.

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Future pricing scenarios in Europe In a continually changing pricing environment, it can be difficult to predict future pricing scenarios. However, for the purposes of planning and forecasting three alternative pricing scenarios in Europe are presented below. The scenarios are based on a five-year outlook and include a best case, worst case and most likely scenario. Scenarios are presented from the perspective of the pharmaceutical company aiming to achieve the highest price possible for the broadest range of products. Table 3.7: Future pricing scenarios in Europe Best case

Worst case

Most likely

Continued reference pricing and parallel trade result in a convergence of European prices at the high end of the current range

Continued reference pricing and parallel trade result in a convergence of European prices at the low end of the current range

Continued reference pricing and parallel trade result in some convergence of European prices at the middle of the current range, but with some differences

No significant increase in the impact of health economics, parallel trade and generic substitution

A significant increase in the impact of health economics parallel trade and generic substitution

A gradual increase in the impact of health economics, parallel trade and generic substitution

Limited negative exposure to low prices in EU accession countries

Significant exposure to low prices in EU accession countries

Gradual negative exposure to low prices in EU accession countries

Business Insights

Source: Delphi Pharma

Best case pricing scenario In a best case pricing scenario, European prices will converge at the high end of the current range as result of successful protection strategies against the pressures of parallel trade and reference pricing. European prices would be maximized through protecting the high prices currently achieved in the UK and Germany and raising the lower prices prevailing in France, Italy and Spain. While some convergence of prices appears inevitable, achieving a high average price will rely on the support of

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governments in low price countries, which is unlikely given continued costcontainment measures.

Where cost containment concentrates on older and generic products, the opportunity for achieving high prices in support of innovative and effective treatments will remain. Even in light of the high cost of healthcare provision, most Governments continue to recognize the need for an incentives mechanism for innovation in healthcare. In a best case pricing scenario current levels of generic substitution and use of health economics will prevail across European markets. Governments, such as the UK, are unlikely to reverse pro-generics or pharmacoeconomics regulations, but similar legislation will not be enforced in new markets, or extended in established ones.

In a best case pricing scenario the accession of 10 new countries to the EU will not have any significant effect on prices throughout the EU-15. Reference pricing systems will be adjusted to protect against a lower average EU price, and current measures protecting against parallel imports and generic substitution will be extended.

Worst case pricing scenario In a worst case pricing scenario, European prices will converge at the low end of the current range as companies fail to protect against the pressures of parallel trade and reference pricing. If pharmaceutical companies were unable to initiate adequate protection strategies against parallel trade and reference pricing, European prices would be minimized through eventual price reductions in high price markets such as Germany and the UK. While some convergence of prices appears inevitable, without the continued support of governments in high price countries average European prices will decline to levels similar to those found in low price countries.

In a worst case pricing scenario, government reimbursement bodies across Europe will continue to implement wide-ranging cost containment measures. The prices of all pharmaceuticals, including new, old, generics and innovative new therapies, will be cut and reimbursement access will be limited. Governments may begin to compromise the

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need for R&D incentives in order to achieve the significant reductions in healthcare costs needed to provide continued coverage. In a worst case pricing scenario current levels of generic substitution and use of health economics will be increased across all European markets. Governments, such as the UK, that already implement pro-generics or pharmacoeconomics regulations will extend their regulations, while those markets without such regulations will implement new ones.

In a worst case pricing scenario the accession of 10 new countries to the EU will have a negative effect on prices throughout the EU-15. Reference pricing systems will be affected by a lower average EU price, and parallel imports and generic substitution will be extended.

Most likely pricing scenario Over the next five years, the most likely European pricing scenario will involve continued convergence of prices across different markets, resulting from the ongoing pressures of parallel trade and reference pricing. Average prices will tend towards the middle of the current range, with high price markets such as the UK and Germany lowering prices and low price markets such as France, Italy and Spain increasing average prices, particularly for innovative therapies. However, the availability of some protection against the effects of parallel trade and reference pricing will result in some continued price differentials between markets.

In the most likely pricing scenario the impact of pharmacoeconomics, parallel trade and generic substitution will continue to increase gradually. These indirect cost containment measures will continue to play an important role in managing the healthcare spend for all European Governments. The speed of uptake for these measures will continue to be tempered by general objection from the pharmaceutical industry, but inevitably the objectives of Governments and the patient will carry greater weight than the financial aims of pharmaceutical companies.

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In a most likely case pricing scenario the accession of 10 new countries to the EU will have a small, but negative, effect on prices throughout the EU-15. Reference pricing systems will be adjusted to protect against a lower average EU price, but some reference pricing relationships will inevitably result in downward pressure on prices. Current measures protecting against parallel imports and generic substitution will be extended, but general levels of activity will be increased by the inclusion of the new low-cost accession markets.

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CHAPTER 4

Pricing and reimbursement in Japan and the rest of the world

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Chapter 4

Pricing and reimbursement in Japan and the rest of the world

Summary The Japanese healthcare system is characterized by high pharmaceutical expenditure and price controls are an important part of the system. The upper limit for pharmaceutical prices in Japan is the NHI drug price. The NHI drug price list fixes the names and prices of drugs for which healthcare providers can be reimbursed under Japan’s health insurance programs. The reimbursement price is determined separately by the MHLW. All drugs included in the NHI drug price list are fully reimbursed except for a patient co-payment. The primary driver behind expected reform in Japan’s pharmaceutical pricing structure is likely to be the rate of economic recovery. In a depressed economy, as experienced by Japan since the late 1990s, the government will continue to look for places to cut costs rather than put in place radical changes to existing systems. Over the next five years, the most likely pricing scenario prevailing in Japan will involve a continuation of the current reimbursement reform led by biennial pricecutting. By weighting the cuts against generic and ‘me-too’ products, innovative products can still continue to receive premium prices, while the overall drugs bill is reduced. Price setting is likely to become more complex in the Japan, with the addition of health economic data and pro-generics regulations to the current reference pricing system. However, the Japanese market will continue to be protected from parallel trade. With no principle of international exhaustion in Japan, companies will continue to prevent their products from being imported from other countries using their trademark rights.

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Introduction The pricing environment in Japan and other markets outside of North America and Europe is primarily determined by its healthcare system and pricing regulations. However, other issues such as pharmacoeconomics, parallel importing and generic substitution also impact on pricing decisions in the pharmaceutical market. Following a number of recent developments in the Japanese pricing environment, future drivers and resistors for pharmaceutical pricing are unclear. However, an understanding of the best, worst and most likely future pricing scenarios help to provide guidance as to how to manage those functions impacting on future pharmaceutical pricing and reimbursement decisions.

Japanese pricing regulations Japan operates a mandatory National Health Insurance (NHI) system covering the entire Japanese population. Healthcare is financed by insurance premiums paid by those enrolled in the country’s various health insurance schemes (employee health insurance scheme, mutual aid associations and a health program for the elderly). The Ministry of Health, Labor and Welfare (MHLW) manages pharmaceutical regulatory affairs in Japan.

The Japanese healthcare system is characterized by high pharmaceutical expenditure and price controls are an important part of the system. The upper limit for pharmaceutical prices in Japan is the NHI drug price. The NHI drug price list fixes the names and prices of drugs for which healthcare providers can be reimbursed under Japan’s health insurance programs. The reimbursement price is determined separately by the MHLW. All drugs included in the NHI drug price list are fully reimbursed except for a patient co-payment. The level of patient co-payment is determined by

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patients’ occupation and can range from less than 10% for an elderly inpatient to a 30% contribution by agricultural workers and the self-employed. Table 4.8: Co-payments for drugs/services in Japan Occupational status Agricultural workers/Self-employed Employees Family members of employees (Outpatient) Family members of employees (Inpatient) Elderly (Outpatient) Elderly (Inpatient)

Level of co-payment per drug/service 30% 20% 30% 20% 10% (different methods in hospitals and clinics) 10% (maximum; varies by income level)

Source: Japan Pharmaceutical Manufacturers Association

Business Insights

The NHI price indicates the level at which health insurers will reimburse hospitals, clinics and pharmacies for drugs dispensed to patients. Hospitals and clinics are able to negotiate discounts from the manufacturer or wholesaler but can still claim full reimbursement at the NHI listed price. The price discrepancy is known as yakkasa and can be kept by the prescribing party. This practice has been a significant driver of prescribing rates.

The MHLW has tried to counteract the effects of yakkasa by encouraging bungyo. Bungyo is the separation of the prescribing and dispensing functions, which used to be carried out by hospitals under the Japanese medical system. Because yakkasa is decreasing, Bungyo pharmacies are a growing feature of the Japanese market. However, the reforms are not welcomed by, among others, hospitals or clinics, since these specifically have to sacrifice the profits associated with yakkasa.

New chemical entities (NCEs) are added to the NHI drug price lists four times a year and comparator drugs are used to determine prices. Drugs for comparison are selected based on therapeutic category. The price of the new drug is based on the comparator’s price with additional premiums being added based on the level of innovation, usefulness and market size. The Drug Pricing Organization (DPO), established in 2000,

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acts as an advisory body with the role of providing a secondary opinion on the price of drugs. Table 4.9: Classification for price premium (Japanese healthcare system) Classification based on usefulness

Premium

Innovative Useful (I) Useful (II)

Standard 40%, range 20–60% Standard 10%, range 5–15% Standard 3%, range 1.5–4.5%

Classification based on market size

Premium

Designated as orphan and pharmacologically new Small market and pharmacologically new

Standard 10%, range 5–15% Standard 3%

Source: Japan Pharmaceutical Manufacturers Association

Business Insights

Price cuts are a commonly used cost-containment tool in Japan and the MHLW revises drug prices every two years. This has the effect of closing the gap between NHI drug prices and market prices. Drug prices may also be changed following a review of changes in market size, indications, dosage and administration. This is known as “repricing”.

The prices of generic drugs are listed annually. The initial price of a generic drug is set at 70% (previously 80%) of the price of the brand name drug. However, if other generics are already out in the market, the price of the new generic drug is the price of the cheapest existing generic drug. If there are 20 or more existing generic drugs, the new generic drug will be priced 10% lower than the cheapest existing drug.

Recent developments The downturn in the Japanese economy has had a negative impact on healthcare financing from insurance premiums, resulting in deficits in the Japanese healthcare budget, which is already feeling the strain of an ageing population. Currently more than a third of all healthcare expenditure is used for the treatment of the population over the age of 70. 159

The Japanese pricing reform debate began in 1997 when an extra, previously unscheduled price cut of an average of 3.0% was enforced. This led to discussions of Japan’s pricing arrangements by all concerned parties scheduled to implement reform in April 2001. Serious discussions and ideas for reform were discarded by the government in favor of another NHI price cut of an average of 7.0%, pushing back the reform deadline to April 2002. A further round of price cuts of an average of 6.3% in April 2002 again pushed back the deadline for significant reform.

The overriding aim of the reforms is to reduce yakkasa for all new and patented drugs, product groupings, and generics. In 2002, a working group was established and slow reform of the system began. Some of the key measures of reform included: significant biennial price cuts were made. In addition to the conventional 6.3% downward price revision, the price of branded drugs for which generic competition exists was reduced on average by 5%; a new system for setting reimbursement prices for NCEs came into effect. The system has been geared towards establishing a price premium for innovative products. The system uses modified criteria for comparator selection and takes into account the daily cost of treatments and international price comparisons. Importantly, the system enables companies to suggest prices for their products and to provide data to support their cases for reimbursement; in order to increase the use of generics, a range of measures including changes to fees have been introduced; co-payments for elderly beneficiaries above a certain income threshold were increased from 10% to 20%.

A major area of debate is international reference pricing, which is unpopular in Japan. The NHI prices drugs marketed internationally by referencing to the drug prices of the US, Germany, UK, and France. However, Central Social Insurance Medical Council (Chuikyo) members representing medical bill payers and medical professionals did not

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agree with the adjustment of prices in comparison with other countries. The reason is that some drug prices were kept high because they were compared to high priced countries like the US. For example, AstraZeneca’s Seroquel (quetiapine) was approved in February 2001. The drug was priced 4 times higher than Johnson & Johnson’s Risperdal (risperidone), the previous gold standard, and Sumitomo’s Lullan (perospirone), which was approved at the same time as Seroquel. Lullan and Seroquel were both priced by comparison against Risperdal (risperidone). However, the price of Seroquel was raised 4-fold compared to Lullan after Seroquel prices in the US and the UK were considered. The following criticisms were noted by the Chuikyo members: the cost calculation method uses the same sales and general administrative expenses regardless of the market size; reliability of the list of US drug prices; appropriateness of the countries selected for comparison.

The primary driver behind expected reform in Japan’s pharmaceutical pricing structure is likely to be the rate of economic recovery. In a depressed economy, as experienced by Japan since the late 1990s, the government will continue to look for places to cut costs rather than put in place radical changes to existing systems.

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Pharmacoeconomics in Japan For the last 10 years, the Japanese Ministry of Health and Welfare (MHW) has requested,

though

pharmacoeconomic

not

required,

analysis

for

the

submission

reference

use

in

of

data

determining

derived prices.

from The

pharmacoeconomic guidelines, which are part of the MHW’s plans to establish more binding regulations, are the same for each submission and adhere to a standard format. The following economic data are required by the MHW to be included in submissions for new drug approvals: final outcome; intermediate outcome; type of analysis; target population; time horizon; comparator (alternative treatment or no treatment); results: cost calculation and comparison.

Even though these requirements are not mandatory, they are widely regarded as such by pharmaceutical companies and the MHLW. Consequently, in almost all cases, pharmacoeconomic data are submitted for new pharmaceutical products. Although the system appears well organized and sophisticated there are difficulties in identifying costs and outcomes due to a lack of acceptance of randomized clinical trials and a cultural barrier to quantifying the costs of healthcare interventions. Sound pharmacoeconomic evaluations require data from randomized clinical trials and validated cost data to facilitate an objective appraisal as to the effectiveness of an

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intervention. However, due to a lack of data from randomized clinical trials, such appraisals are difficult in the Japanese system.

In the recent debate and discussions surrounding the reform of the Japanese pricing system, there have so far been no proposals to introduce mandatory pharmacoeconomic assessment. However, Japanese pharmaceutical companies are beginning to realize the value of pharmacoeconomic data both for R&D and pricing purposes. Therefore, the role of pharmacoeconomic in Japan is likely to increase in the future.

In April 2001, the JPMA helped establish a chair in pharmacoeconomics in the Faculty of Pharmaceutical Sciences at the University of Tokyo. It is hoped that this will further the development and diffusion of pharmacoeconomics as an academic discipline. The JPMA will donate ¥50 million ($0.4 million) annually to the University of Tokyo for the chair in pharmacoeconomics over a 5-year period. It is expected that research will be carried out on the pharmacoeconomics of drugs to treat or prevent senile dementia, cancer, and lifestyle-related diseases.

In 2004, Hiroyuki Sakamaki, Research Department Director of the Institute for Health Economics and Policy, argued that pharmacoeconomic data can help to identify products with “outstanding efficacy”, which in turn can be rewarded through price premiums.

Over

recent

years

the

number

of

manufacturers

that

include

pharmacoeconomic submissions in National Health Insurance pricing applications has declined, with the industry still unsure as to how the information is used.

Parallel importing in Japan Japan does not subscribe to the principle of international exhaustion, which means that companies can prevent their products from being imported from other countries using their trademark rights. In recent discussions over reform of the Japanese healthcare and

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pharmaceutical pricing systems, the introduction of parallel importing has not been suggested as way to reduce healthcare costs.

Generic substitution in Japan Following the introduction of a new patent law in 1995, the term of a patent in Japan has been extended to 20 years from the date of application. It was previously 15 years from the date of publication for the purposes of opposition, but not more than 20 years from the date of filing. The new law has several benefits: most importantly, it permits inventors to make patent applications in a foreign language, providing they also file a Japanese translation of the application within two months from the application date. At present, English is the only acceptable language and the Japanese version remains the authentic text. Additional fees have to be paid for English applications.

The new Japanese patent law allows opposition to patent applications to be filed within six months of the date of publication of the granted patent. Previously, it was acceptable to file oppositions prior to grant, following the publication of the examined patent application. In 1998, the Japanese Diet (parliament) approved several revisions to the Japanese patent law, including the damage compensation system, the design system and improvements to annual patent fees. In April 1999, Japanese patent authorities introduced laws allowing local generics companies to conduct development work before patent expiry, thus providing benefits similar to those of the Roche/Bolar provision in the US. Under this ruling, the Japanese Supreme Court decided that experimental and research work conducted by generics companies prior to patent expiry does not infringe patent laws, providing the work is needed to submit applications for approval.

In 2004, the Japan Generic Pharmaceutical Research Group called for radical action to help grow the generics sector in Japan and allow patients to benefit from “low priced, high quality drugs”. Generics, which account for an estimated 8% of pharmaceutical sales by value, grew by less than 2% in the fiscal year to March 2004. 164

In July 2004, the Ministry of Health, Labour and Welfare added 380 new generics to the National Health Insurance (NHI) price list at the annual listing of generics. A total of 124 active ingredients in 275 specifications from 85 companies were added, bringing the number of generics on the NHI price list to almost 12,500. The new additions include the first generic versions of 16 active ingredients, among them high selling drugs such as omeprazole, nifedipine, itraconazole and doxazosin mesilate. In line with the new pricing rule, the NHI price of all new active ingredients was set at 70% of the original product.

Future pricing scenarios in Japan In a continually changing pricing environment, it can be difficult to predict future pricing scenarios. However, for the purposes of planning and forecasting three alternative pricing scenarios in Japan are presented below. The scenarios are based on a five-year outlook and include a best case, worst case and most likely scenario. Scenarios are presented from the perspective of the pharmaceutical company aiming to achieve the highest price possible for the broadest range of products. Table 4.10: Future pricing scenarios in Japan Best case

Worst case

Most likely

Continued pricing cuts in the place of wide-ranging reform resulting in price differentials supporting high prices for innovation

Wide-ranging pricing reform resulting in significant downward pressure on prices, reimbursement levels and prescription volumes

Gradual pricing reform led by differential price cuts supporting innovative products

Refined reference pricing accounting for purchasing power disparities and product differentiation

Strict internal and external reference pricing resulting in lower prices

Continued protection against parallel trade and significant generic substitution

Introduction of health economics and pro-generics regulations alongside refined reference pricing

continued protection from Legislative changes resulting parallel trade in introduction of parallel trade, increased generic substitution and use of health economics

Business Insights

Source: Delphi Pharma

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Best case pricing scenario In a best case pricing scenario, the Japanese MHLW would continue to postpone significant, wide-ranging reform of the healthcare reimbursement system. Biennial price cuts would continue, but their level would decline and their differential impact increase, weighted more heavily towards older drugs and generics. Under this scenario new products could still continue to command high prices, while current effective therapies would not be significantly affected by price cuts or reform.

The reference pricing system would be refined over time, ensuring effective therapies are isolated from the rigid referencing structure. Internal reference pricing parameters will be relaxed to allow greater disparities between effective and ineffective therapies, while external parameters would reflect differences in purchasing power prevailing between Japan and its European reference markets. This would allow Japanese prices to continue to display a greater level of internal and external price differentiation compared to reference pricing countries in European.

Under a best case scenario, the Japanese pharmaceutical industry would continue to be protected from both parallel imports and high levels of generic substitution. Until the round of price cuts in April 2002 generic products were allowed prices often no cheaper than a number of ‘me-too’ branded products within a drug class. The mechanisms for an effective generic substitution policy would require significant price discounts for generics relative to their branded equivalents.

Worst case pricing scenario In a worse case pricing scenario, the Japanese MHLW would undertake wide-ranging reform to the healthcare reimbursement system, in place of continued price cutting. Any reform would be aimed at achieving significant cost containment and a complete reversal of yakkasa prescribing. Although the specific details of any such reform are difficult to forecast, the effects are likely to result in both lower reimbursable prices, as well as cuts in reimbursing per se. Whether reimbursement is cut as a whole through formulary lists or physician budgets, or whether patient co-payments are increased, the

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likely result would be a decline in prescription volumes for the pharmaceutical industry.

The internal and external reference pricing parameters currently applied to price setting would be made stricter in order to reduce prices further. Internal reference pricing would drag high prices lower in line with cheaper ‘me-too’ products and generics. External reference pricing would use the lower prices in European reference markets to place further downward pressure on the prices of current and future products sold in the Japanese market.

In a worse case scenario, Japanese legislation could be updated opening up the market to parallel trade. As global trade advances in all Japanese industries, it would seem inevitable that the barriers to parallel trade with the domestic market would be relaxed over time. Similar changes to legislation and regulations would also result in high growth in the generics industry and in the utilization of pharmacoeconomic evaluations. With levels of generic substitution in Japan amongst the lowest of all major international markets, significant impact could be made by a robust, Government-led generics substitution strategy. Similarly, if pharmacoeconomic evaluations were to be used more widely in the price-setting and reimbursement processes in Japan, further cost containment pressures would be likely to follow.

Most likely pricing scenario Over the next five years, the most likely pricing scenario prevailing in Japan will involve a continuation of the current reimbursement reform led by biennial pricecutting. By weighting the cuts against generic and ‘me-too’ products, innovative products can still continue to receive premium prices, while the overall drugs bill is reduced. A shift in the criteria needed to achieve a high reimbursement price is, therefore, likely to occur, putting pressure on the innovation generated through R&D in Japan.

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Price setting is likely to become more complex in the Japan, with the addition of health economic data and pro-generics regulations to the current reference pricing system. While the parameters used in reference pricing decision are unlikely to change significantly in the future, the addition of health economics evaluations to pricing applications is likely to result in a further barrier to achieving higher prices. An effective therapy does not always generate positive results in pharmacoeconomic evaluations, depending on the criteria and parameters used. Further steps protecting the generics industry in Japan, and regulating the right to launch a copy product rapidly following a patent expiry, are likely to result in greater pressure on the prices of postpatent branded products.

In a most likely scenario the Japanese market will continue to be protected from parallel trade. With no principle of international exhaustion in Japan, companies will continue to prevent their products from being imported from other countries using their trademark rights. While it is likely that such measures will be reversed over time, as result of internal cost containment pressures and external free trade pressures, any significant moves are unlikely over the next five years.

Australian pricing regulations In Australia, a national Pharmaceutical Benefits Scheme (PBS) provides timely, reliable and affordable access to necessary and cost effective pharmaceuticals. Considerable subsidies are paid for pharmaceuticals covered by the PBS, resulting in lower consumer prices. Approximately 90% of prescriptions in the Australia pharmaceutical market are prescribed for PBS items.

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Pharmaceuticals listed under the PBS fall into 3 categories: unrestricted – these medications have no restrictions on their therapeutic uses; restricted benefit – the listing in the PBS Schedule details the specific therapeutic uses for which these medications can be prescribed; authority required benefit – as with the Restricted Benefit, the Schedule lists the specific uses for which these medications can be prescribed. In addition, for items listed under this category, the prescriber is required to obtain prior approval from the Health Insurance Commission.

The majority of prescriptions in Australia are written for medications subsidized under the PBS. The price of all products listed on the PBS are reviewed annually by the Pharmaceutical Benefits Pricing Authority (PBPA). The price reviewed and agreed to with suppliers is at the price to pharmacists level (including a 10% wholesaler’s margin).

In reviewing the price of listed items and in considering the price of items recommended for listing, the PBPA takes into account a number of factors: Pharmaceutical Benefits Advisory Committee comments on clinical and cost effectiveness aspects of items; the price of alternative brands of a drug; comparative prices of drugs in the same therapeutic group; cost information provided by the supplier; prescription volumes, economies of scale and other factors such as expiry dating, storage requirements, product stability and special manufacturing requirements; the level of activity being undertaken by a company in Australia, including new investment, production, research and development; 169

prices of the drug in reasonably comparable countries; other relevant factors which the applicant company may wish the PBPA to consider; any directions of the Minister for Health.

Benchmark pricing The PBPA considers drugs in their therapeutic sub groups when reviewing prices. A benchmark product is chosen on the basis of the lowest costs and other products are priced in line with the benchmark product.

A premium above the benchmark price is allowed where the supplier of the product is able to demonstrate an advantage in clinical and cost effectiveness terms. Most products listed on the PBS are priced under this method. However, it is often the case that no price increases can be justified as one or more products in the therapeutic group have not sought any increase or prices are considered reasonable by the PBPA.

Cost plus method Under the cost plus approach, the price recommended by the PBPA is based on the cost of manufacture plus a margin. Costs allowed under this method do not include distribution costs, promotional or marketing activity or general administration. This method is used for stand-alone items and for benchmark products. It relies on pharmaceutical suppliers providing the PBPA with accurate cost data.

The margin provided under this approach can vary from 15% to 40% (equivalent to a mark-up of between 18% and 67%) depending on a number of factors including the price sought by supplier, the estimated usage, the unit price and overseas prices.

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Average monthly treatment cost This is a variation of the reference price method that can be applied within a therapeutic sub group, usually where a medicine used to treat chronic conditions is supplied in a number of strengths. The method takes into account actual clinical usage and requires detailed utilization data.

Prices for new items The main mechanism to determine initial prices is the advice from the Pharmaceutical Benefits Advisory Committee (PBAC) which is an independent body of medical experts established to advise the Minister for Health about which products and for what indications products should be subsidized by the Government. PBAC provides advice on clinical effectiveness and cost effectiveness. It has been a requirement for drugs sponsors to submit cost effectiveness data on new items since the start of 1993.

In recent years, the PBPA has increasingly recommended the use of price/volume arrangements (unit prices decrease as volume increases), particularly where unit prices are reasonably high and there is the potential for significant volumes or where there is uncertainty about future volumes.

Chinese pricing regulations Starting as an experiment in Shanghai in 1994, China now maintains both a national and provincial/local set of reimbursement lists for the sale of pharmaceutical products in state-run hospitals or clinics. The national list contains more than 1,400 drugs that are acceptable for reimbursement from state-controlled insurance organizations. Provincial/local lists must mirror the national list but are given a 10% “local readjustment” flexibility. Inclusion on the lists is a largely negotiated process.

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Prices for drugs on the reimbursement lists are tightly controlled and many foreign importers have found prices too low for their inclusion. Since 80% of drugs sold in China are sold through hospital pharmacies, being excluded from these lists means huge losses in sales. However, only 10-15% of the population is covered by statecontrolled insurance plans, and exclusion from one or more of theses lists may not have any significant adverse effects on a foreign importers market share.

The Chinese government currently imposes a tariff of around 9.6% on imported pharmaceuticals, plus a 17% VAT charge, customs clearing charges and drug inspection costs. However, pharmaceutical prices are further inflated by high distribution costs and hospital mark-ups, with retail prices paid by hospitals often as much as 10 times higher than the manufacturer’s price.

As in most developing nations, China is struggling to contain health care-related costs. This problem is compounded by the fact that around 70% of China’s total health care costs are directly related to the sale of pharmaceuticals. More than 50% of this cost can, in turn, be traced to the expensive imported drugs. In response to this, Chinese central government authorities have established guidelines designed to place price caps on imported drugs, with domestic drugs already subject to such measures.

The State Development Planning Commission (SDPC) has said that it wants to reexamine the pricing of medicines in China, as well as decreasing the cost of oversupplied drugs. A notice issued by the SDPC in April 2001 required drug prices and relevant policies to be published at designated media outlets 5-7 days before they were implemented. It also imposed a cap on the profit margins of drug companies.

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CHAPTER 5

Pricing strategies for new drugs

173

Chapter 5

Pricing strategies for new drugs

Summary Much can be done in the very early stages of development to lay the groundwork for a robust reimbursement strategy throughout the product lifecycle. Ultimately, the goal of a reimbursement strategy should be to ensure that a product achieves a sustainable pricing and reimbursement status for a particular patient population, which will provide a return on investment. Consequently, pharmaceutical companies must be able to make decisions that enable them to steer product development to ensure that these aims are met. Once the Phase II review process has been completed and a defined target population for a drug has been identified, Phase III trials represent the primary opportunity for collect evidence that will demonstrate the benefits offered by products. Companies must, therefore, design trials that are geared to demonstrate superior clinical effectiveness (efficacy, safety and side-effect profile) with respect to other treatment options and to generate pharmacoeconomic data that enables a thorough analysis of costs and outcomes in comparison with other treatment options. To maximize investment in work carried out during development, it is imperative that companies ensure that the evidence that demonstrates product value and supports the case for reimbursement is effectively communicated and taken into account in the decision-making process. Companies must therefore identify and exploit opportunities to communicate the value of products and influence decision-makers’ thinking. Of the five major pharmaceutical markets in the EU, the UK should be chosen first for a product launch. This is because drugs are allowed to enter into a high value market that enables companies to command prices without the limitation set by reference pricing.

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Introduction Pricing and reimbursement strategies are being employed at earlier stages of the drug development lifecycle. Price optimization underlines portfolio management decisionmaking and trial management efforts across the drug development pipeline. Once drugs reach the market, pricing and reimbursement dossiers are required to support claims with the various regulatory and payors bodies. Reference pricing systems and parallel importing in Europe mean that companies must determine an optimal launch order in which to make pricing claims.

Pricing strategies in early-stage development Initiatives taken early in the product lifecycle, principally between the preclinical and Phase I stages of development, are concerned with making an initial assessment of the pricing and reimbursement opportunity of products and beginning foundation work that will support an ongoing pricing and reimbursement strategy.

Historically, unmet need, efficacy and safety were the key influencing factors in pricing and reimbursement decision-making. As such, the activities undertaken by pharmaceutical companies in pursuit of reimbursement were essentially the same as those required for product approval and the traditional aims of product development: demonstrating efficacy and safety via randomized clinical trials. Pharmacoeconomic activities were deemed to be of relatively low importance and seen as secondary activities restricted to late-stage development.

The recent addition of economic considerations in healthcare decision-making has added another set of requirements for achieving reimbursement and, therefore, ensuring return on investment. Just as demonstrating safety and efficacy is a key consideration

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for pharmaceutical companies right from the start of product development, so too should demonstrating the economic value of products.

There is a strong business case for commencing pricing and reimbursement activities at the earliest stages of product development, either preclinically or in Phase I. The purpose of early initiatives are two-fold: to assess the business opportunity of products and act as an initial management tool to determine the pharmaceutical candidates that should be taken into development; to begin to build a knowledge base that will enable informed decisions to be made throughout development.

Much can be done in the very early stages of development to lay the groundwork for a robust reimbursement strategy throughout the product lifecycle. Ultimately, the goal of a reimbursement strategy should be to ensure that a product achieves a sustainable pricing and reimbursement status for a particular patient population, which will provide a return on investment. Consequently, pharmaceutical companies must be able to make decisions that enable them to steer product development to ensure that these aims are met.

To make strong decisions, pharmaceutical companies must be in a position to assess the competitiveness of drug candidates with respect to the value they will offer healthcare systems and society once launched. It is, therefore, imperative that pharmaceutical companies are positioned to understand pharmaceutical candidates in the context of their market environments. Most importantly, pharmaceutical companies must be able to analyze the economics of target therapy areas early in development.

Activities conducted in early-stage development will primarily be concerned with gathering data in order to build a framework, upon which drug candidates can be assessed. The more work that is carried out early in development, the more robust the ongoing reimbursement strategy will be, as the information gained will be used to steer

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and support later-stage activities. Moreover, time spent in preparation should translate to more effective capital and resource allocation in later-stage development and marketing activities.

Therapy area analysis Most work carried out in early-stage development should be concerned with building an understanding of the therapy area for drug candidates. A review of target therapy areas should commence early in development and should be continually refined as development progresses. Companies should begin to gather information relating to: disease epidemiology; how treatment and care is delivered; the needs of the market; pricing potential.

Epidemiology analysis Companies must build a detailed understanding of the disease area early in development. For example, information relating to the prevalence and incidence of the disease should be collected and forecasts of potential future market sizes should be made. Companies should seek to segment information as much as possible (i.e. to the national and regional level and by sub-population).

Treatment delivery analysis Consideration must be given to existing treatment options (drug and non-drug) and how any associated care is delivered. Companies should begin to develop knowledge of the costs and benefits associated with each treatment option in order to assess the impact of their use on patients, healthcare systems and society as a whole.

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In addition to existing treatment options, companies should also take into account future treatment options that will become available at the time of product launch and their potential impact on the therapy area should be assessed. Most companies will have access to information relating to other treatment options in development.

Market needs analysis An assessment of the current and future needs of the market should be undertaken to enable companies to identify opportunities for drug candidates to add value by addressing unmet needs. Companies must examine needs from the perspective of each relevant stakeholder. For example, in addition to the clinical and humanistic needs of patients, companies must also take into account the needs of physicians, care givers and healthcare payors. Consideration should be given in relation to both current and future drug and non-drug treatment options.

Pricing analysis Companies should begin to assess the pricing potential for each therapy area and patient population. Companies should compile a database of pricing information for current treatment options and make an assessment of future pricing potential. For example, companies should take into account factors such as the degree of genericization expected in the therapy area in the future and the impact that the presence of generics will have on any pricing opportunity.

Cost analysis Before an initial analysis of the economics of the therapy area can begin, it is necessary to quantify all costs associated with different drug and non-drug healthcare interventions.

The costs associated with healthcare interventions may be divided into three categories: direct, indirect and intangible. Direct costs are those that relate directly to the provision of healthcare, for example, drug acquisition costs and hospital staff time. Indirect costs

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are those that fall outside the direct provision of healthcare, for example, costs associated with the provision of social care and loss of productivity associated with the intervention. Intangible costs are those for which it is difficult to assign a financial value, for example, patient satisfaction, anxiety, pain and suffering.

Having completed the costing process, it is then possible to use the information gained to begin to apply economic evaluations that will facilitate the comparison of treatment options in terms of their value for money. While this process is conducted in the early stages of development to gain a greater understanding of existing healthcare interventions, later in Phase III development, when data from pharmacoeconomic studies becomes available, it will be repeated to enable the value of pipeline products to be compared with other available interventions.

Economic analysis Pharmacoeconomic analysis in early drug development is a powerful tool with which to conduct competitor analysis. Having built a comprehensive understanding of the product’s market, it should be possible to begin to build models that enable existing healthcare interventions to be compared with respect to their associated costs and benefits, while an assessment can be made with respect to their relative value for money.

Although uncertainty exists in the early stages of development because prior to clinical trials there is little information available to determine relative product value, it is useful to be able to determine the relative commercial impact of different outcomes on a pipeline product’s value for money. The ability to model different scenarios is essential. By making assumptions about a product’s profile, such as its efficacy, tolerability, pricing and formulation, and assigning probabilities to different scenarios, the likely value for money of a product can be simulated and compared with existing treatment options prior to clinical trials commencing. Such information can be used to influence internal decisions as to whether to continue or terminate project development and to determine the priority status of projects within the overall development program.

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In this capacity, pharmacoeconomic models represent an additional management tool for determining the commercial viability of products, and consequently, in setting priorities and guiding the distribution of resource.

Economic models that enable the comparison of healthcare interventions with respect to their value for money are commonly used by healthcare decision-makers in reimbursement decisions. Moreover, decision-makers’ guidelines often require pharmaceutical companies to provide pharmacoeconomic models as a core component of submission dossiers. Therefore, in addition to being employed in the early stages of development as a management tool for internal decision-making, pharmacoeconomic models are essential for demonstrating product value to decision-makers prior to market launch.

As with any form of pharmacoeconomic analysis, for it to be useful in decisionmaking, pharmacoeconomic models must have an explicitly stated perspective (e.g., societal, hospital, third party, payor, etc). Therefore, companies must ensure that they develop models early in the product lifecycle that take into account the perspectives of each key decision-maker audience because the priorities of each audience and the types of analysis required will differ. Additionally, companies must ensure that the data underlying models is transferable between and within markets—a model which is based on resource cost data gathered from the US is unlikely to be of use to decisionmakers in Japan.

The perspective taken by the model will also determine the costs and benefits that are incorporated in the analysis. For example, a model with a wide societal perspective implies that all costs (direct, indirect and intangible) will be included. Models with a societal perspective are most likely to be used by decision-makers who are responsible for national reimbursement decisions. Whereas a model that adopts the perspective of a hospital administrator is likely to be concerned with only direct costs (i.e. those costs incurred by the hospital).

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While these models are powerful decision-making tools, there will always be limits to the degree to which they can reflect reality. Therefore, when submitting models to decision-makers it is important that all underlying assumptions are made clear, the methods of data collection are provided and all uncertainties in the model are detailed to enable an understanding of the models limitations.

As discussed previously, while valuable in determining the relative cost effectiveness of healthcare interventions, pharmacoeconomic analysis does not address the issue of affordability (i.e. the ability of healthcare budgets to stretch to cover new drugs). Therefore, in addition to the development of pharmacoeconomic models there is a growing need for pharmaceutical companies to develop models that enable decisionmakers to assess the impact of new drug introductions on healthcare budgets. By incorporating epidemiological data and making assumptions about the number of patients likely to benefit from the product, its likely market penetration and the displacement of other healthcare interventions, the impact of introducing the drug on a patient population or healthcare system can be modeled.

Within a company, budget impact models allow various pricing scenarios to be examined in context of the ability of different healthcare systems to afford new products. Once again, the ability to assess the potential for drugs to be refused reimbursement on the grounds of affordability early in development is crucial in terms of setting priorities and guiding the distribution of resource across pipelines.

While the value of models is limited in the early stages of development due to a paucity of data, as development progresses and data from clinical trials, pharmacoeconomic studies and other sources becomes available they will become increasingly refined and their value as management tools will increase.

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Decision-maker analysis A range of factors are taken into account by healthcare decision-makers in determining the reimbursement status of drugs, the inclusion and weighting of which will vary on the international and national scale due to differences in the priorities of governments and healthcare providers. Consequently, healthcare policy, regulation and the information requirements of decision-makers will also exhibit considerable variation: a factor that must be taken into account early in the product lifecycle if product development is to be steered meet the information needs and priorities of each key decision-maker. Therefore, it is necessary for companies to identify these differences in policy and regulation and understanding the needs and priorities of decision-makers in each key market and healthcare setting. Activities that support these aims should be initiated early in the product lifecycle to ensure that development is steered to accommodate the requirements of each key market.

The first priority in analyzing healthcare decision-makers should be to identify all of the decision-making bodies in each market that will have an influence on product use and reimbursement. It is important that companies do not focus exclusively on national decision-making bodies because, while it is important to secure reimbursement at the national level, reimbursement decision-makers at the regional and local level are growing in importance. It is reimbursement at this level that is key to securing return on investment.

Following the identification of decision-makers, mapping and tracking of policy and regulations relating to pricing and reimbursement processes must be undertaken for each decision-maker. This will provide an understanding of the information requirements of each decision-maker, i.e. how do submission guidelines differ between markets, or what are the likely changes that can be expected going forward? Information gathered at this stage will feed directly into the design of late-stage clinical trials.

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In addition to tracking activities, companies should seek to establish relationships with decision-making bodies. Close communication with decision-makers can be used to build a predictive capability into product development, thereby enabling a company to identify potential decision-maker objections, concerns and barriers earlier in development.

End-user stakeholders include a range of groups for which the introduction of a pharmaceutical product will have a meaningful impact. This may be with respect to directly benefiting from its introduction or through involvement in its provision and/or associated care. End-user stakeholders commonly include patients, carers and healthcare professionals.

Companies must begin to identify all potential end-users and undertake an analysis of the specific needs and issues that relate to each group. This will provide guidance for development and in forming a marketing strategy that supports the value case for products.

Market research Market research is one initiative that can be employed early in development to better understand how a product would be adopted and used once launched, for example building a better understanding of likely prescribing/purchasing patterns and considerations. Not only can this be of value with respect to assessing the business opportunity of the product, but it can also be used later in the product lifecycle to provide decision-makers with a clearer picture of the product’s impact following launch.

Holding focus groups with stakeholders is an aspect of market research that should be used to build a deep understanding of stakeholder priorities. As such, focus groups can also be used to provide an opportunity to refine marketing messages and predict hurdles that will be faced once the product is launched. Additionally, interaction with

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physician and patient groups will help refine segmentation of the market, thereby enabling high-value areas to be identified and helping formulate product positioning.

In addition to focus groups, the recruitment of individuals that are recognized as experts in their field can be employed to add significant value early in development. Such individuals, who are referred to as key opinion leaders, provide an independent perspective and can offer significant value from both the point of view of building a detailed understanding of the therapy area and assisting in guiding development. Additionally, their standing as experts in the field means that they are often involved in advising payor decision-making, as such their inclusion will aid in analysis of decisionmaker requirements.

Initial assessment of drug candidates Once analysis has been conducted, the knowledge gained should be used to undertake an initial assessment of the business opportunities presented by drug candidates. At this point, companies should be in a position to begin to make assessments as to the comparative value of patient populations within each therapy area. High value populations will be those that have a high degree of unmet need that can be addressed by pharmaceutical intervention and offer an opportunity for return on investment in terms of patient population size and pricing potential.

Having identified a patient population that presents an attractive opportunity, an initial assessment can be made regarding the potential for drug candidates to add value and accordingly the candidates potential to achieve sustainable pricing and reimbursement. Ultimately, companies must identify patient sub-populations in which products will make a significant difference.

Undertaking this initial assessment process will provide an additional aid when making decisions regarding the candidates that should be taken into development, those that are candidates for out licensing and the projects that should be terminated.

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In summary, undertaking the initiatives described above early in development will provide a better understanding of the business opportunity presented by each product. Increased understanding will provide an environment geared toward fact-based decision-making and one that is more capable of quantifying uncertainty. This should enable: product development to be guided in a more timely and cost-effective manner; increased predictive capability on likely reimbursement issues and potential barriers early on in development; guidance of later-stage trial design with respect to requisite data and outcomes requirements; more effective product positioning, forming the basis to developing meaningful and appropriate sales and marketing messages targeted at and tailored to the needs and priorities of decision-makers and end-users.

Best practice dictates that the initiatives that enable assessment of the value opportunity should begin as early in development as is possible, ideally when products are in the preclinical phase and should undergo an iterative process of refinement as development progresses. However, the degree to which this can be achieved will be dictated to a large extent by capital and resource constraints. For instance, it may not be possible to justify preclinical assessment for all products in a portfolio with a large number of early-stage compounds, due to the burden that this would put on capital and resources. A more cost-effective strategy would be to selectively target the most promising compounds or begin assessment at a later stage once compounds have been eliminated. However, the later an assessment is begun, the less room there is for maneuver in terms of its use in the decision-making process and for steering product development.

In best practice, the initial assessment should be completed no later than Phase IIa. A hypothetical example may be used to illustrate the value that can be lost in starting the value assessment late. In this hypothetical example, a pharmaceutical company has a

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compound with a range of potential indications. An initial assessment of the value opportunity for each indication is due for completion by Phase IIa. However, by this stage the company has already begun to invest in aligning development to target two of three potential indications. Once the initial assessment has been completed, it becomes apparent that the opportunity available for reimbursement for one of the indications being pursued is likely to be low. In this situation, a decision has to be made on whether to pursue development and take on the risk of failing to secure suitable reimbursement or terminating development and accepting a capital loss. Completion of an initial assessment earlier in development could have eliminated this dilemma.

Pricing strategies in mid stage development In order to steer development and ensure that resource is committed appropriately across projects, it is essential to undertake formal periodic reviews of product profile in order to facilitate informed stop-go decision-making.

The most critical period for undertaking such a review is when data from Phase II trials becomes available. At this point, key development decisions must be made regarding the design and scope of Phase III trials and it becomes critical to make decisions in light to the escalation in R&D expenditure, which will occur as projects enter laterstage development.

Prior to the completion of Phase II trials, companies are only in a position to work on the basis of a hypothesis regarding the products competitive profile. During Phase I, companies are ethically constrained by regulatory authorities as to the scope of trials. Phase I trials are conducted with healthy volunteers and the number of subjects enrolled is generally very limited, furthermore, Phase I trials are primarily designed to examine the metabolism of the drug and associated side-effect profile. It is only at the end of Phase II trials that a good statistical profile will have emerged as to what the product profile is likely to be. In very few cases will a meaningful profile of the product be available from Phase I trials. 186

Evaluating opportunities It is only once the various characteristics of a product’s profile have begun to emerge after Phase II that it becomes possible to examine the pricing and reimbursement opportunities for the product in different market segments. In order to identify those segments that will provide the most attractive pricing and reimbursement opportunities, the comparative value offered by the product in each segment needs to be evaluated.

It is important that products are evaluated in terms of how well they meet the criteria that will be used by decision-makers to ultimately determine pricing and reimbursement status. These criteria will vary by market and by decision-making body, but in general terms they will assess the overall product profile and how it will deliver benefit in practice. In France for example, when undertaking product evaluations, the Transparency Commission will examine the level of medical service rendered by a product using a scale known as the ASMR (Amelioration du Service Medical Rendu) and compare the improvement in medical service rendered by a drug with other existing therapies.

Products that gain a high aggregate score against all criteria and are targeted at market segments with a low degree of competition are likely to be viewed favorably at this stage of development with respect to their reception by healthcare decision-makers.

In market segments where there is a high degree of competition, the comparative value in relation to competing products must be determined and different pricing opportunities evaluated. The key objective at this point is to determine whether the product is likely to be competitively priced. Products offering significant benefits at a competitive price are going to be viewed more favorably by healthcare decision-makers than those offering only marginal benefit at a similar price to competing products. A positive outcome (i.e. a product is deemed to competitive in terms of benefits offered and pricing) at this stage will provide confidence in the pricing and reimbursement opportunity presented by a particular market segment and therefore confidence in continuing product development on its current course.

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Conversely, in cases where products are likely to offer little benefit over competing products and are likely to be categorized as ‘me-too’ products, companies need to give careful consideration to whether targeting a particular market segment offers opportunity for return on investment and whether continuing development on its current course is justifiable. If continuation cannot be justified, options available for increasing reimbursement potential for the product in the market segment must be reviewed. If no viable strategies are available, careful consideration must be given to whether to eliminate the market segment.

Figure 5.13 provides an illustrative representation of this initial decision-making process. In this example, efficacy and safety are the product characteristics being scored against decision-maker criteria and whether it is competitively priced in relation to a competing product. By assessing how well a product meets each criteria for each target segment, and its comparative value in relation to competing products, markets segments can be ranked in terms of their comparative pricing and reimbursement opportunities. This process will eliminate segments in which the product scores poorly until only those segments offering significant pricing and reimbursement opportunities remain. This process will result in a highly defined market for the product that will enable return on investment to be maximized. For example, a higher return on investment may be achieved by targeting a small but highly defined market segment in which a product offers significant benefit to all of the patient population than targeting a larger and less well defined segment in which the product offers only marginal benefit across the population. The former is likely to offer higher pricing and reimbursement potential, competition is likely to be lower and, because the market is highly defined, marketing costs can be decreased significantly. For example, this may be the case for an anti-hypertensive that is targeted specifically at the diabetic population, or a flu vaccine targeted purely at specific high-risk groups, such as the pediatric or elderly population.

Once confident that a defined market segment will present a strong pricing and reimbursement opportunity for the product, Phase III trials can be designed in such a

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way that they accommodate the information needs of decision-makers and outcome requirements can be determined. Figure 5.13: Stop-go decision portfolio review phase IIa

Efficacy and safety

Competitive market comparator intervention

Accept/Go Reject/Stop or implement strategy to improve value Price/cost Business Insights

Source: Delphi Pharma

Having defined a market for the product, companies need to consider a number of additional factors, for example, what will the product displace once on the market? If it is a drug, consideration must be given to its patent life. If the patent life is short, the product is likely to face pricing pressure due to the emergence of generics soon after market entry.

Pharmacoeconomic and budget impact models should be revisited and refined to take into account new data from clinical trials, the specific market segment(s) being targeted and the different scenarios for the displacement of competing products. At this stage, models will present a clearer picture of the comparative value for money offered by products and their impact on healthcare budgets in different patient sub-populations.

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During the review process, companies should seek to use the relationships built early in development with key opinion leaders and decision-making bodies. Companies should test key opinion leaders as to the relative value of products because they will be able to provide an independent view of how the market is likely to react and payor tolerance to different pricing options. Additionally, individuals familiar with the decision-making processes in each key market may be used to assess design of Phase III trials and assess the strength of potential value for money arguments.

Case study: Aventis appeal against NICE… A brief examination of appeals made against the guidance of the National Institute for Clinical Excellence (NICE) in the UK illustrates the need for better understanding of the information requirements and guidance of decision-makers prior to conducting key trials. An appeal by Aventis in May 2002 against NICE guidance (June 2002) relating to the use of taxanes in breast cancer and ovarian cancer is illustrative of the point.

Aventis appealed that in excluding response rates and overall length of survival data from the Institute’s guidance the Institute had failed to consider all relevant data in the appraisal process. However, the Appraisal Committee had considered this data in detail but considered that response rates were a surrogate measure for clinical effectiveness and that progression free survival was a more reliable and relevant measure. The Committee also considered that, in this situation, overall length of survival was a less reliable measure of the clinical effectiveness of an anticancer drug owing to numerous other factors affecting overall survival.

Other appeals illustrating the need for closer communication with decision-makers include: “Use of zanamivir, oseltamivir, and amantadine for the treatment and prophylaxis of influenza” (December 2002, Alliance Pharmaceuticals and Roche Products Ltd) and “Use of paclitaxel for ovarian cancer” (November 2002 BristolMyers Squibb)

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It can be argued, that in such cases a closer relationship and more formal dialogues early in the product lifecycle could have helped guide development more appropriately, thereby reducing time and cost associated with the appeals process.

Improving product value In cases where doubt is raised regarding a product’s prospects of gaining reimbursement, for example when a product is deemed to have only marginal benefit over other treatment strategies, options for improving product profile must be reviewed. The sections below detail potential options for improving product value.

Augmentation of products is one strategy that can be adopted to improve reimbursement potential. Modification of delivery systems and dosing schedules are common strategies for product augmentation that can improve product profile with respect to clinical efficacy, patient quality of life, patient compliance and disease management. The examples given below, while not specifically related to reimbursement, illustrate how modification to delivery systems and dosing schedules can add recognizable value to product profile.

In some instances, modification of delivery systems can change a product’s value proposition significantly. The development of inhaled insulin in the treatment of type I and type II diabetes provides a clear illustration of the value that can be added by modification of delivery systems. Inhaled insulin has the potential to bring about a range of improvements related to patient quality of life, patient compliance and overall disease management compared with subcutaneous injection.

Case study: Johnson & Johnson’s Concerta… Johnson & Johnson’s treatment for attention deficit hyperactivity disorder (ADHD) Concerta (methylphenidate) is a reformulation of Novartis’s Ritalin. Concerta has been formulated with a special drug-release system that allows the medication to be released slowly over time. Whereas Ritalin requires dosing two to three times daily, Concerta provides sustained delivery over 12 hours, requiring once-daily treatment. Although 191

Concerta is essentially a reformulation, the benefits provided to the patient are significant: once-a-day treatment delivers a smoother dose throughout the day, thereby eliminating pharmacological peaks and troughs and the associated highs and lows in children’s attention span; sustained delivery can be important for children with after school activities or homework, particularly in children that have difficulty with ADHD symptoms later in the day; once-daily treatment increases patient convenience for children who have difficulty taking medication. It can also help to reduce the feelings of embarrassment/stigma associated with taking medication during the school day and the required visits to the school nurse.

Pricing strategies in late stage development Once the Phase II review process has been completed and a defined target population for a drug has been identified, Phase III trials represent the primary opportunity for collect evidence that will demonstrate the benefits offered by products. Companies must, therefore, design trials that are geared to demonstrate superior clinical effectiveness (efficacy, safety and side-effect profile) with respect to other treatment options and to generate pharmacoeconomic data that enables a thorough analysis of costs and outcomes in comparison with other treatment options. Demonstrating the clinically important benefits of a drug still remains the most important consideration for Phase III trial design. While best practice would dictate that consideration should always be given to pharmacoeconomic data, the importance of Phase III pharmacoeconomic studies increases when: there is potential for a product to have a significant budgetary impact;

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products are to be launched in markets where health economic assessment plays a role in the reimbursement decision-making process; products are to be launched in cost-constrained markets; products need to be differentiated from other treatment strategies in competitive markets (This is particularly important in cases where decision-makers are likely to undertake economic evaluation, for example when either treatment cost is higher than competing interventions or effectiveness/outcomes are similar to competing interventions). Figure 5.14: Use of economic evaluation

Effectiveness/outcomes

Competitive market comparator intervention

Lower need for pharmacoeconomic evaluation

Economic evaluation by decision-makers

Economic evaluation by decision-makers

Decision-makers likely to view unfavourably

Treatment cost Business Insights

Source: Delphi Pharma

Sub-population analysis It is important that trials are designed to examine the cost and benefits of products in populations that are representative of the ultimate target populations for the product.

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Moreover, decision-makers are increasingly requiring companies to demonstrate product value in patient sub-populations.

In the UK, the National Institute of Clinical Excellence (NICE) set a precedent in this respect in relation to its guidance regarding the use of GlaxoSmithKline’s flu product Relenza (zanamivir). In 1999, NICE recommended that Relenza should not be made available on the NHS due to the low number of high-risk patients in the clinical studies and insufficient clinical effectiveness data to demonstrate the benefit of Relenza in the elderly. Fundamentally, there was insufficient sub-group analysis.

Choosing outcomes The primary goal of clinical development is, most often, achieving regulatory approval for a product. As such, trials are often designed in such a way that safety and efficacy are the primary focus of assessment as these are the primary requirements from regulators. However, in order to demonstrate the competitive value of products companies must undertake trials that are broader in scope than those required for product approval. A strong capability in outcomes research is therefore core to demonstrating the benefits offered by a product and trials must be designed to consider a range of outcomes.

Outcomes fall into three main categories: clinical: efficacy, safety and other medical outcomes; economic: outcomes and consequences of strategies with value measured in economic terms, such as budget costs and resource utilization; humanistic: measured in patient terms, including, health related quality of life, patient satisfaction, functional status, caregiver impact.

Choosing appropriate and meaningful outcomes that will clearly demonstrate the benefits offered by a product is essential for effectively communicating the value of a

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product. However, many clinical trials use surrogate as opposed to clinical endpoints (e.g. reduction in blood pressure rather than strokes prevented or lowering of cholesterol rather than reduction in heart attacks). Surrogate endpoints are of little clinical interest and are of low impact on decision-making.

Demonstrating a real-world outcome (i.e. one that is not technical or abstract), which is easily understood and has a strong message, can provide significant value in decisionmaker assessments and negotiations over drug restrictions. Furthermore, messages from such outcomes can be subsequently leveraged from a marketing perspective to promote the product to patients and physicians. The approach taken by Merck in relation to its drug Zocor provides a key example of successful approaches to choosing meaningful outcomes with strong messages of product value.

Case study: Merck’s Zocor (simvastatin)… Prior to studies carried out on Zocor, the primary outcome measure for the statin drug class was the ability to lower cholesterol. However, in what was one of the largest outcome studies ever, Merck moved away from an end-point based on cholesterol, changing the outcome end-point to examine deaths from heart disease and heart attacks compared to placebo.

In 1994, Merck reported that the results of the Scandinavian Simvastatin Survival Study demonstrated that Zocor could help prevent heart attacks and save lives in people with high cholesterol who have had previous heart disease. Zocor demonstrated 42% fewer deaths from heart disease and 34% fewer heart attacks compared with placebo. In doing so, Merck replaced surrogate outcomes with more meaningful evidence of the drug’s ability to save lives.

While Merck went to great time and expense in conducting large outcome trials, it could be argued that to a large extent this work was responsible for the success of Zocor and that it saved it from being lost in a crowded market and being perceived as a ‘me-too’ product. Indeed, the accessible nature of outcomes from the study have

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enabled Merck to use them as a powerful marketing tool, turning Zocor into a front-line therapy for cardiovascular disease.

Patient reported outcomes As the name suggests, patient reported outcomes (PROs) are assessed and reported by patients and encompass a wide spectrum of measures. For example, PROs are commonly used to assess the impact of an intervention on patients health-related quality-of-life (HRQoL) (i.e. the impact of interventions on a patient’s physical, emotional and social well-being).

PROs are becoming a more important element of decision-maker evaluation of healthcare interventions. Consequently, for a complete assessment of the benefits offered by an intervention it is becoming increasingly important to examine PROs during development.

While a wide range of instruments exist for capturing patient reported outcomes, controversy exists over the best methods and a number of reports have criticized studies for their failure to use appropriate measures. Additionally, while many generic instruments that are designed to be applicable across a range of populations and interventions have been developed, in many cases, they are not sensitive enough to demonstrate a real difference in benefits between interventions.

Given the controversy over this aspect of outcomes research, historically, patient reported outcomes have tended to have little impact on reimbursement decisionmaking. However, much activity in recent years has focused on the development of instruments that are designed to be applicable to specific diseases or specific subpopulations. Such examples are the arthritis impact measurement scales and the EORTC Cancer quality of life questionnaire. As more reliable methods for the measurement of patient reported outcomes are developed and guidance as to the appropriateness of measures is produced, it will become possible to compare

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interventions using patient reported outcomes and it is likely that they will be incorporated more commonly into decision-maker evaluations.

To improve the validity of patient reported outcomes companies should give consideration to the development of instruments that are specialized for the indication and patient population involved in studies. Importantly, if patient reported outcomes are to be incorporated, time must be spent during Phase II development to validate any instruments to ensure that meaningful results are obtained from Phase III studies.

In addition to the aim of achieving reimbursement coverage, patient reported outcomes are particularly important from a marketing perspective and supporting claims for products. To maximize the marketing potential of patient reported outcomes, clinical trials must be aligned with marketing concepts thereby ensuring that there is consistency between the outcomes measured and planned marketing claims.

Pfizer’s approach to demonstrating the burden of sexual dysfunction on patients and the benefits offered by its drug Viagra (sildenafil citrate) provides a good example of the successful design and use of a specific instrument for measuring patient reported outcomes.

Case study: Pfizer’s Viagra… The clinical development of Viagra, Pfizer’s oral therapy for sexual dysfunction illustrates the value gained from investing resource in developing innovative methods to measure and demonstrate quality-of-life outcomes.

Prior to receiving approval from the FDA, Viagra was tested on more than 3,500 men. The effectiveness of Viagra was evaluated in the majority of studies using a range of assessment instruments. While improvement in erections can be objectively assessed by measurement of hardness and duration, the primary measure chosen by Pfizer in the principal studies was a multi-dimensional scale for assessing erectile dysfunction (the International Index of Erectile Function (IIEF)), which became the primary efficacy 197

measure in later trials. The IIEF took the form of a patient administered 15-item questionnaire, which addressed the issues of erectile function, orgasmic function, sexual desire, intercourse satisfaction and overall satisfaction.

Two questions from the IIEF served as primary study endpoints. These related to the ability to achieve erections sufficient for sexual intercourse and the maintenance of erections after penetration and were scored from 1–5: (0) no attempted intercourse; (1) never or almost never; (2) a few times; (3) sometimes; (4) most times; and (5) almost always or always.

Sexual function data was also reordered by patients in a daily diary. In addition, patients were asked a global efficacy question and in some cases interviews with the men’s partners were also conducted to corroborate reports.

In developing the IIEF, Pfizer was able to quantify and measure what are essentially intangible outcomes, such as satisfaction and desire. In doing do so, Pfizer was able to effectively demonstrate the real-world benefit of Viagra for men suffering from erectile dysfunction in an easily understood and meaningful manner.

Head-to-head trials In most instances, in order to achieve regulatory approval companies are only required to demonstrate the performance of a drug compared to placebo. While scientifically valid data may be available from placebo-controlled trials, they provide decisionmakers with little information as to the value of a product relative to other available treatment options and, therefore, represent a sub-optimal strategy for demonstrating product value. A clearer view of a product’s relative value can be gained from conducting head-to-head trials with other treatment options.

However, historically the pharmaceutical industry has been reluctant to adopt this approach. Further to the additional cost incurred, reluctance arises from the fact that although strong performance against a comparator will have a positive impact on the 198

reception given to the product by the market, a poor result against a comparator is likely to have an equally negative effect. While placebo-only trials do not offer the upside that can be achieved by implementing head-to-head trials, they are seen as a safer option because placebo-only trials do not present the same degree of risk.

Taking into consideration the healthcare payor criticism leveled against the number of ‘me-too’ products offering only marginal benefit and the drive to discriminate against these going forward, pharmaceutical companies are likely to come under increasing pressure to adopt an approach based on conducting head-to-head trials to demonstrate relative value. Following portfolio review in Phase II, in cases in which a product’s emerging profile appears to offer significant competitive advantage relative to competing treatment options consideration should be given to undertaking head-tohead trials.

Those involved in trial design should ensure that comparators used in head-to-head trials will enable a strong message to be delivered to decision-makers. The majority of drugs in development, once launched, will to some degree displace existing treatment options. Therefore, when evaluating new drugs, decision-makers are looking to see what will be displaced, either by way of other products or other costs. As such the concept of displacement is a key consideration in reimbursement decision-making. Consequently, companies designing trials must attempt to demonstrate that in target populations their products offer benefits over the treatment options that they will displace.

Trials must be designed to ensure that comparators are relevant to each decision-maker in each market in which a product is to be launched. However, while many Phase III trials are multinational in nature and designed to achieve global market entry, there may not be a global pattern to treatment options that are displaced. For example, the treatment option that will be displaced in the UK may not be the same as the treatment option displaced in France, which in turn may not be the product displaced in Germany. Where this is the case, companies should address the biggest markets first, strategically picking the best mix of comparators, these should then be used in Phase 199

IIIa trials. Any remaining comparators can then be put into Phase IIIb studies once comparative value has been demonstrated effectively for the major markets.

Phase III pharmacoeconomic studies To be of value to decision-makers, it is important that pharmacoeconomic trials are designed in such a way that they reflect the costs and benefits of using a product in real clinical practice as closely as possible. Although pharmacoeconomic data can be generated through Phase III randomized clinical trials (RCTs), applications of economic evaluation have revealed weaknesses in Phase III studies and results may be unrepresentative of cost effectiveness in real world settings.

Firstly, RCTs are often designed in such a way that safety and efficacy are the primary focus of assessment; therefore, economic measures are often outcomes of secondary interest. Also, compounded by time constraints, there is often focus on intermediary as opposed to long-term outcomes, for example efficacy over effectiveness.

In addition to the above points, the design of RCTs is geared towards emphasizing internal validity (demonstration of clinical significance) over external validity (demonstration of significance in the real world). Due to variation in the real world, in terms of healthcare setting, patient population, medical practice and resource costs, the requirements needed to achieve statistically meaningful results in economic terms are much larger than those required to achieve statistical significance in clinical terms.

Economic studies carried out under clinical trial settings are often unusable because they collect data where variance is so significant that it invalidates the result. As such, data is not easily transferred between markets or treatment settings and is, therefore, of little use to decision-makers. Due to conducting studies in experimental settings in Phase III RCTs: patient populations are highly selected and non-representative of heterogeneous populations in the real world;

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dosage regimens are constrained; the level of resource use and the cost of resources do not accurately reflect the variation in the real world; are not geared for individual country assessments studies and do not adequately reflect the key parameters for each local or national population of interest.

Although RCTs present a number of problems, due to their high internal validity they remain the gold standard in economic evaluation and for the generation of pharmacoeconomic data, which can be used to support product claims prior to evaluation by decision-makers. Companies must, therefore, seek ways to improve the external validity of this data. Investing in Phase III studies that more closely reflect the real world is one way in which companies can improve the external validity of data. These so-called naturalistic trials should: more closely reflect routine clinical practice; use a more flexible dosage regimen; use usual care instead of a placebo comparator; use enrollment criteria that generate populations more representative of actual practice; have increased sample sizes; include outcomes such as quality of life and utility measures; be of long duration, when necessary to capture long-term outcomes and increase the amount of data collected; sample the variance of resource use and costs in the real world (i.e. between and within each market and by setting).

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Naturalistic trials are therefore more suited to provide the data needed to estimate the real benefit of the treatment in actual care. When costs are applied and compared with benefits the efficiency of allocating resource to a new drug can be estimated.

While the above measures may be taken to improve the external validity of pharmacoeconomic data, they are likely to increase the length of Phase III trials and will affect the speed at which a product reaches the market. Companies must therefore evaluate the trade off between value to be gained by improving the quality of pharmacoeconomic data and the potential for lost profits due to delayed market entry. By way of compromise, one strategy to balance the trade-off would be to identify those economic factors that will be of most significance to decision-makers and limit the scope of Phase III studies to these. Phase IV studies can then be undertaken post launch to address outstanding issues and increase the robustness of value for money arguments.

Phase IV studies In order to maximize return on investment from a product, it is not sufficient to only secure suitable pricing and reimbursement in the period immediately after launch. Companies must also ensure that they maintain desired pricing and reimbursement over the entire product lifecycle. However, maintaining price and reimbursement post launch is becoming increasingly challenging in light of a number of trends: pressure on healthcare budgets has made wide ranging product pricing and reimbursement revisions more common, for example the price cuts experienced in France, Germany, Spain and Italy over the past two years; in addition to undertaking evaluations of new drugs, healthcare payors are reevaluating drugs already covered by formularies. For example, the National Institute for Clinical Excellence (NICE) in the UK will review both new and old drugs and guidelines from the Academy for Managed Care Pharmacy (AMCP) in the US warns manufacturers that they should be prepared for decision-makers to undertake periodic reviews of drugs;

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devolution of healthcare responsibility as is occurring in Italy, Spain and Sweden, increases opportunity for price erosion due to the implementation of regional costcontainment initiatives in light of strained healthcare budgets.

The above trends reinforce the need for companies to implement strategies that defend product price and reimbursement post launch. In best practice, companies should endeavor to monitor product performance post launch and continue to collect evidence through Phase IV studies.

Following product launch, without the pressure of speeding time to market, longer naturalistic Phase IV studies can be undertaken. These studies should be used to address the limitations of pharmacoeconomic data generated by RCTs, thereby enhancing the validity of the data. Conducting studies that demonstrate a product’s effectiveness and cost effectiveness in real world clinical settings can provide a strong case against downward revisions of price or reimbursement status.

While company budgetary constraints will dictate the investment that can be made in such initiatives, an economic study on a drug that has already been approved and is being used in clinical practice is far less of a cost burden than studies on an unapproved product. Recruitment, for example, is less of a barrier as patients and physicians are more willing to take part in studies involving drugs that have already been shown to be safe and efficacious. Additionally, patients will already be receiving the product from their physicians and receiving reimbursement, it is therefore not necessary for the pharmaceutical company to take full responsibility for organizing and funding post launch studies.

Companies should strive to maintain updated dossiers so that evidence can be given to decision-makers at short notice. In order to anticipate post launch reviews, companies should maintain close interaction with decision-makers and track policy developments.

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In addition to pure pricing and reimbursement considerations, decision-makers will use older products as comparators for the evaluation of new competitor products. Being in a position to provide up-to-date evidence of product value in real-world clinical settings strengthens competitive advantage in comparisons with competitor products. For example, a strong comparator dossier may prevent a new competitor achieving a higher rate of reimbursement, thereby eliminating any market uptake advantage that could be achieved due to differences in reimbursement rate.

Pricing strategies for new product approvals Ultimately, the reimbursement status of a product lies in the hands of the various decision-makers in each market. To maximize investment in work carried out during development, it is imperative that companies ensure that the evidence that demonstrates product value and supports the case for reimbursement is effectively communicated and taken into account in the decision-making process. Companies must therefore identify and exploit opportunities to communicate the value of products and influence decision-makers’ thinking. Ideally, activities initiated early in product development (focus groups, policy tracking etc.) will have enabled relationships with decisionmakers to be formed and enabled a detailed understanding of their priorities, information requirements and the decision making process to be built.

Submission dossiers Submission dossiers are often the primary source of information available to decisionmakers when undertaking evaluations upon which reimbursement decisions are made. As such, they represent the primary opportunity for pharmaceutical companies to communicate product value and present arguments to support pricing and reimbursement. While the precise requirements of each decision-maker will vary, within submission dossiers, companies should seek to: describe the product fully;

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demonstrate how the product will be used in therapy (description of the clinical condition being treated and the role of the product in its treatment); provide evidence of clinical safety, efficacy and effectiveness; provide relevant economic and quality of life data; present economic evaluations of the impact on healthcare systems and wider “societal impacts” (clinical outcomes and cost/resource impact supported by models); provide independent evidence to support arguments.

In short, and in the words of the Academy for Managed Care Pharmacy, submissions should contain “all possible clinical and economic information necessary to assess the overall clinical utility and value that a product brings to a specific patient population and healthcare system.”

In most cases, when a product enters the market, it will displace other treatment strategies or other aspects of healthcare provision, and as such, every decision is based upon the concept of displacement (i.e. decision-makers will look to see what is likely to be displaced by the product, either by way of other products or by way of costs). It is, therefore, critical that companies ensure that dossiers compare products to the treatment strategies and interventions (drug or otherwise) that are likely to be displaced.

To ensure that the opportunity to communicate product value presented by submission dossiers is maximized, pharmaceutical companies must commit time and resources to work in partnership with decision-makers in advance of submissions. In best practice, companies should seek to notify decision-makers of the status of products in development and of their intent to submit for assessment well in advance of submissions, clearly indicating intended timelines. Meetings should then be scheduled with decision-makers in order to cement an understanding of specific submission

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requirements. This process will ensure that the information contained within dossiers is: delivered to the standards and format required by each decision-maker; appropriate in scope; of high quality, clear and verifiable; relevant to the priorities of the decision-maker. For example, data must be relevant to the healthcare system and population under the jurisdiction of the decisionmaker; delivered in a timely manner; transparent, for example complex economic models/data must be fully described, easy to use and investigate, and all assumptions fully detailed.

Following the submission of evidence, pharmaceutical companies must ensure that they are equipped to provide appropriate support to decisions makers. For example, companies must be prepared to provide further information quickly upon request and lines of contact, detailing personnel equipped to provide additional information, should be made clear.

Identifying key decision makers While pricing and reimbursement decisions are often made on a national level, independent assessments for pricing and reimbursement purposes will often be undertaken below this level. In France for example, the country’s largest healthcare institution, the Assistance Publique - Hopitaux de Paris (AP-HP), will put products through its own reimbursement criteria. Therefore, as part of an effective strategy, companies must identify and understand the needs and priorities of the decision-makers down to the lowest level in each market (i.e. to the level of local hospital formulary, local general practice formulary or private practice formulary).

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While formal submission dossiers may not be required for each healthcare provider, companies must be positioned to provide multiple packages (e.g. economic models, analysis of impact of healthcare setting) that communicate product value and support formulary inclusion. Critically, each initiative must be tailored to the specific needs and priorities of each audience. In best practice, understanding the needs and perspectives of each decision-maker will have been undertaken in the early stages of the product lifecycle, and development subsequently steered to take into account key issues.

Failure to secure reimbursement In an ideal scenario, having compiled and submitted a strong dossier, a company will achieve the desired reimbursement status prior to, or shortly after product launch. However, in practice, companies often find themselves in a position in which they are forced to launch products with only partial, or in the worst case, no reimbursement. In cases such as these, companies can seek to implement strategies to improve the reimbursement coverage for products.

Broadly, companies have three available options: work with decision-makers to address issues underlying the reimbursement decision; apply pressure on decision-makers through lobbying activities; broker compromise agreements with healthcare payors.

In most cases, companies will implement a combination of the above.

Working with decision makers… Upon failure to achieve a desired reimbursement status, companies should seek dialogue with decision-makers to identify the specific issues underlying their decisions. It may be the case that decision-makers require additional evidence or that there are misconceptions relating to the original submission. Having identified the drivers of the

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decision, companies will be positioned to either undertake studies to present new data that will promote a review of the product’s reimbursement status or clarify and educate decision-makers with respect to the data originally submitted.

Case study – Eli Lilly’s Xigris… Eli Lilly’s fight to improve the reimbursement to status of its sepsis drug Xigris (drotrecogin alfa, activated) demonstrates the value of working alongside and effectively communicating and educating decision-makers about a product’s value.

In November 2001, the FDA approved the use of Xigris for the reduction of mortality in adult patients with severe sepsis who have a high risk of death. Clinical trial data had shown that Xigris could reduce mortality from severe sepsis by 19% at 28 days compared with placebo and conventional care. However, because trial results were based on only 28 days of data, decision-makers questioned the ability of Xigris to continue to reduce patient deaths over longer periods.

Lilly charges $6,800 for a sepsis treatment and following its launch in the US, under Medicare rules, hospitals received no reimbursement for the product. The high price and lack of reimbursement is one factor that discouraged use and contributed to slower than expected sales for the product.

In an attempt to improve the reimbursement status of Xigris, Lilly held extensive talks with Medicare officials in order to better explain clinical data, to clear-up misconceptions and to promote the drug as a significant advancement in the treatment of sepsis. In July 2002, Lilly’s strategy eventually paid off: Xigris became the first new medical product to be granted new technology status from the Centers for Medicare and Medicaid Services (CMS) under the provisions of the Benefits Improvement Act of 2000 (BIPA). The designation now allows hospitals that use Xigris in the treatment of Medicare patients with life-threatening severe sepsis to receive additional reimbursement: Medicare will reimburse up to 50% of the average cost of Xigris. Lilly

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is now working alongside the CMS to enable the creation of a new diagnosis related group (DRG) for severe sepsis.

Applying pressure through lobbying… The ability to lobby decision-makers effectively is becoming an increasingly important competence for pharmaceutical companies. In the US, for example, a number of issues such as the potential for legislative action to control drug costs has prompted companies to boost their lobbying capabilities in recent years.

In a number of cases, lobbying campaigns have been critical in improving the reimbursement status of products and pharmaceutical companies must be prepared to carry out such campaigns in cases where products are assigned a reimbursement status that fails to reflect its value. The development of internal lobbying and policy functions is an essential step in building lobbying capability.

Case study – Amgen’s Aranesp… With respect to lobbying, Amgen is one of the most active companies in the US, spending approximately $3m a year to lobby Congress and has had past success in defending the reimbursement rate for its products. In 1998, Medicare revised a rule that meant that Amgen’s anemia drug Epogen was reimbursed in such a way that dialysis centers were not using enough of the product to raise patient blood cell counts to healthy levels. This action was taken after Senator Arlen Specter, chairman of the health and human services subcommittee, held a hearing on the matter. Additionally, each year since 1997, Medicare has recommended a 10% cut in Epogen payments, but Congress has not supported any such price reductions.

Epogen and Procrit are brand names for the same anti-anemia drug, epoetin alfa, which was developed by Amgen. The company has exclusive marketing rights for Epogen in the end-stage renal disease (ESRD) market. In 1985, Amgen sold exclusive rights for the drug to Johnson & Johnson for the non-ESRD market. Johnson & Johnson markets the drug under the brand name Procrit to oncologists, cancer centers and patients for 209

treatment of various forms of anemia, with chemotherapy-induced anemia as its principal focus.

Amgen’s new anemia drug Aranesp (darbepoetin alfa) has been granted approval for the treatment of anemia for patients with chronic renal failure and chemotherapyrelated anemia in cancer patients. Aranesp therefore competes directly with Procrit in the non-ESRD market.

In 2002, Medicare had proposed to set reimbursement for Aranesp at 95% of the $748 market price. However, Johnson & Johnson stepped in and stated that it believed Aranesp and Procrit were “functionally equivalent” as both products use the same biological mechanism to produce the same clinical result (i.e. the stimulation of the bone marrow to produce red blood cells). Based on this assessment, Johnson & Johnson argued that Medicare should not set reimbursements for Aranesp at a higher level than Procrit. Following a period of review, the Centers for Medicare & Medicaid Services (CMS) decided that Aranesp was "functionally equivalent" to Procrit and determined that Aranesp should be reimbursed at the same rate. In January 2003, Medicare reduced reimbursement fees for Aranesp to 59% of its market price ($370 per weekly dose), thereby making it more expensive for hospital outpatients than Procrit.

However, Aranesp differs from Procrit by the addition of two carbohydrate chains, a factor that gives Aranesp a biologic half-life three times longer than Procrit. Based on this fact, Amgen argued that Aranesp is superior to Procrit as it is more potent and offers the benefit of an improved dosing schedule: Aranesp can be given as an injection every two to three weeks, while Procrit must be injected once a week. Amgen believes that the CMS ignored these facts and was wrong to characterize Aranesp and Procrit as “functionally equivalent”.

Amgen has conducted a highly visible and aggressive lobbying campaign to over-turn the CMS decision and increase Medicare payments for Aranesp. While the issue has yet to be resolved, Amgen has made progress, for example:

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Amgen has solicited numerous letters from lawmakers, which have put pressure on the CMS to reconsider its position; in a letter to the director of the CMS, seven congressional leaders demanded to see the paperwork supporting the agency's decision; according to the letter, lawmakers have been particularly interested in studies that enable comparisons of the two drugs. Medicare and the National Cancer Institute are now reported to be planning head-to-head studies; Republican Nancy Johnson, who heads the House health subcommittee, has asked the General Accounting Office, the congressional watchdog agency, to examine the “functional equivalence” of Aranesp and Procrit.

Brokering deals… One strategy that has emerged in recent years is to seek compromise agreements with healthcare payors. In such agreements, healthcare payors and companies agree to an initial price or reimbursement rate for a product following launch and a set of preagreed conditions, that can trigger a reduction in the price or reimbursement rate at a later date. Agreements are structured to manage financial risk to both the healthcare system and the pharmaceutical company. Examples of such agreements include: linking price/reimbursement reductions to sales. The healthcare payor agrees to reimburse a product at a higher rate until the product achieves a pre-agreed sales target, after which the price or reimbursement rate is reduced by a predetermined amount; linking price/reimbursement reductions to time after launch. The healthcare payor agrees to a high initial price/reimbursement rate for a pre-agreed period of time, after which the price or reimbursement rate is reduced by a predetermined amount regardless of sales; linking pricing/reimbursement to specific performance criteria. The payor agrees to a high price/reimbursement rate as long as particular performance criteria are met.

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For example, if the cost effectiveness of a product drops below a certain threshold, the price or reimbursement rate will be reduced these reductions may be based on a sliding scale.

Historically, the most common agreements to have emerged from pricing and reimbursement negotiations link the price or reimbursement rate of a product to its sales performance. However, more recently there have been examples of departures from this deal structure. Two key landmark deals that have been brokered in recent years have been an agreement between the French government and Pfizer and Pharmacia over the pricing of their arthritis drug Celebrex (April 2001) and a financial risk sharing deal created in the UK for the multiple sclerosis drug beta interferon (July 2000).

Case study – Celebrex in France… In April 2001, the French government signed an agreement with Pharmacia and Pfizer regarding their arthritis drug Celebrex. Under the agreement, both companies guaranteed to reduce the price of Celebrex by 18% from 2004 onward in return for securing its position on the government list of reimbursable drugs. Importantly, unlike most pricing agreements, the agreed price reduction is not linked to sales of the drug.

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External support One strategy for improving the effectiveness with which organizations interact with and effectively communicate product value to decision-makers is to use external organizations with specialist expertise. The use of such external organizations can be a cost-effective alternative to establishing internal capabilities and additionally brings an objective point of view to the process.

A range of organizations exist that are equipped to provide a suite of services relating to interacting with and communicating the value of healthcare strategies to decisionmakers. These may include research organizations, management consultants, public relations specialists and contract research organizations. For example, when seeking to implement a strategy based on lobbying, public relations organizations often have a detailed knowledge of healthcare decision making and have a proven capability in dealing with regulatory and policy issues related to the pharmaceutical market. External organizations can provide: detailed knowledge of decision-maker submission requirements and experience in collating submissions. Indeed some organizations will have been involved in establishing guidelines; detailed knowledge of healthcare regulations and policy; experience in communicating technical information, for example data from outcomes and cost-effectiveness studies; personnel training, for example dossier collation and value communication.

EU launch order Companies wishing to enter Europe should be aware that although the drug approval process is harmonized, controls to drug pricing and reimbursement are highly fragmented. Due to national controls over pricing and reimbursement and Europe’s drive to reduce healthcare costs, understanding the key issues affecting each EU

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country is essential. Figure 5.15 illustrates the optimal country-by-country sequence to launch a pharmaceutical prescription product in the EU15. Figure 5.15: Optimal country-by-country sequence launch for entry into the EU-15 countries EU major markets

UK*

Fra*

Spa*

Ita*

Fin*

Ned*

Ire*

Den*

Lux

Bel

Swe*

Por*

Aus

Ger*

Remaining EU markets

Gre

Legend Suitable for launch

Consider factors affecting launch

Launch with caution

* Generic substitution allowed Business Insights

Source: Delphi Pharma

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First choice countries… Of the five major pharmaceutical markets in the EU, the UK should be chosen first for a product launch. This is because drugs are allowed to enter into a high value market that enables companies to command prices without the limitation set by reference pricing. Without reference pricing, companies have flexibility over their drug prices although, this is in part limited by the pharmaceutical price regulation scheme (PPRS). However, the UK government has proposed that the PPRS may be relaxed or abolished, therefore, leading to a greater deregulated pricing market.

Second choice countries… France, Finland, Denmark and Sweden should be chosen as ‘second launch’ countries. The healthcare payers in these countries do not favor high priced branded drugs unless the products come from an innovative drug class or have new modes of actions. France has initiated a new reference pricing system that encourages the use of generic drugs, imposed price cuts to branded products already on the market, and reclassified the reimbursement system. However, in a move to create a positive environment for innovative products, the country is seeking to raise prices for these therapies to be in line with northern European markets. Finland and Denmark have both amended their pricing criteria so that drug prices are in line with the European average. Finland is proposing to reform its reimbursement system so that drugs will be reclassified. In Denmark, a new reimbursement scheme has been introduced, which is based on a medical need-dependent system for example, a system of gradually increasing reimbursement depending on patient type. In Sweden, the healthcare system is decentralized, therefore, regional councils will have greater influence in pricing and reimbursement decisions. Regions can be targeted as a result of different healthcare needs defined by regional demographics and budgets. However, they may also be fragmented due to these differences. A new government agency has also been introduced in Sweden and will result in quicker pricing and reimbursement decisions.

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Third choice countries… Within the five major markets in the EU, Spain and Italy should be chosen as ‘third launch’ countries. Other EU countries included in this launch sequence are: the Netherlands, Ireland, Luxembourg, Belgium, Portugal and Austria. These countries have mixture of pricing and reimbursement policies that do not always favor newer products that have moderately better benefits than predecessors indicated for a similar disease market.

Spain and Italy both have regionalization policies that have led to the decentralization of healthcare control. As a result, pricing and reimbursement negotiations may be more complex due to the variations in healthcare needs and budgets between different regions. Furthermore, both countries have implemented industry-government agreements that have led to price cuts and capping. In a positive move for the industry, Spain is addressing its healthcare needs by encouraging R&D innovation through the funding of more non-industry-based research projects. In the Netherlands, reform to its reimbursement system has been proposed by allowing insurance companies to have a greater role in decision-making. Proposed changes to its reimbursement criteria also refer to inclusion of rigorous health economic assessments.

In Ireland, closer dialogue between the industry and government has led to mutually beneficial agreements relating to the control of drug prices. The government has also reduced patient payments to its public health insurance scheme, therefore, affecting drug choices as a result of costs. In Luxembourg, a proposed change to its reimbursement criteria will lead to a streamlined list of marketed drugs. However, the environment does support innovative products entering the market. Belgium has balanced its cost containment measures by introducing a new reimbursement list that aims to reduce the time taken for reimbursement. In Portugal, agreements between government and industry have led to the control of drug pricing. Furthermore, it has proposed to review its reimbursement criteria with the aim of reclassification and delisting. A new reference pricing system in Portugal has been proposed but plans have not yet been implemented.

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The industry and government in Austria are attempting to streamline the pricing and reimbursement process by enabling products approved through the centralized procedure to be automatically accepted for reimbursement. This will enable companies to market products quickly in a relatively short timeframe. In addition, the Austrian government is taking a positive approach for reimbursing new drugs for currently untreatable diseases.

Fourth choice countries… Although Germany is one of the five major pharmaceutical markets in the EU, the country has recently undergone radical healthcare reform that will impose challenges to the German pharmaceutical industry. These cost containment legislations place the country as a ‘hostile’ environment to launch products into. Therefore, Germany is chosen as the fourth choice country to launch in. Recent cost cutting measures have seen the introduction of a new reference pricing system, plus requiring pharmacists to substitute generic drugs over branded products. Furthermore, proposals are underway to target the social health system by reducing healthcare contributions, which will influence the choice and use of drugs.

The other country outlined in this arena is Greece, because it has not accepted European average prices and is still attempting to obtain the lowest drug price across the EU. The Greek market does not encourage pharmaceutical companies to price their products competitively. As a result, market entry to Greece should be launched with caution due to unfavorable market conditions.

Global price optimization As the impact of external reference pricing and parallel trade continues to increase the interaction of prices between different markets is also increasing. The optimization of pharmaceutical prices can no longer be limited to a market-by-market approach, but must involve a comprehensive understanding of the interactions prevailing between country prices. Country-specific pricing and product managers can no longer work in

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isolation, but must collaborate to understand the impact of pricing in one country on other markets.

Through the impact of reference pricing and parallel trade, the ability of pharmaceutical companies to achieve premium prices in some markets can be compromised by lower prices in others. These cross-country pressures are best illustrated by the situation in Europe, where both reference pricing and parallel trade have a significant impact on pricing. Using the example of just two companies, France and Spain, the impact of pricing in one country on that in another can be shown. Both external reference pricing and parallel trade result in pressures on reducing the price disparity between countries. Prices in Spain are generally amongst the lowest in Europe. However, France references the prices of Spain, amongst other countries, in order to determine prices. Therefore, in order to achieve reimbursement status the price differential must be minimized. Similarly, a high price differential results in parallel imports from Spain to France, cannibalizing the pharmaceutical sales revenues in France. Again, parallel imports results on pressure to minimize the price differential between countries. The pricing decision in France is impacted significantly by the price in Spain and, therefore, the two markets and there interaction must be considered together. Figure 5.16: Global pricing and the interaction between countries

Parallel trade

France

Price differential

Spain

Reference pricing Business Insights

Source: Delphi Pharma

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CHAPTER 6

Pricing strategies for established drugs

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Chapter 6

Pricing strategies for established drugs

Summary The pricing of a reformulation relative to other formulations, within its brand franchise can be divisive in dictating the success of reformulation strategies. To achieve growth, manufacturers must often strike a balance between the premium pricing of reformulations (and reaping the potential for price driven sales growth) and ensuring that pricing remains competitive and does not restrict volume driven growth. While price and volume driven growth can often be achieved, in some instances, due to the existence of cost sensitivities, pricing reformulations at a discount to existing formulations within their brand franchises can be employed a tactic to drive uptake of a reformulation. Patient expansion strategies seek to access new opportunities and grow sales in an additive manner. The ability to access new treatment settings, patient populations and indications often requires significant differentiation from existing formulations of the parent molecule. Successful execution of these strategies require reformulations to be differentiated, offering value to stakeholders that can be translated to premium pricing. Discount pricing can be particularly important in providing an additional switching incentive for physicians and patients in instances where reformulations are poorly differentiated from their predecessors. In contrast to patient expansion strategies, patient switching and generic defense reformulations are often priced at a discount to their predecessors following launch. Implementing a price decrease at or prior to patent expiry allows brands to compete on a price basis with generics, and may enable the company to maintain its relationships with wholesalers and pharmacists by offering a known and trusted product and service while going some way to matching the generics manufacturers on price.

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Introduction For established drugs, there are two main opportunities for revisiting a product’s pricing strategy. When a drug is extended or switched to a new reformulation the pricing strategy can be re-evaluated in order to reposition the product against its competitors. Alternatively, impending generic competition also results in a change in the competitive dynamics and thus represents an opportunity for repositioning a product with respect to price.

Strategic pricing of reformulations The pricing of a reformulation relative to other formulations, within its brand franchise can be divisive in dictating the success of reformulation strategies. To achieve growth, manufacturers must often strike a balance between the premium pricing of reformulations (and reaping the potential for price driven sales growth) and ensuring that pricing remains competitive and does not restrict volume driven growth. While price and volume driven growth can often be achieved, in some instances, due to the existence of cost sensitivities, pricing reformulations at a discount to existing formulations within their brand franchises can be employed a tactic to drive uptake of a reformulation. Such tactics are common in campaigns requiring rapid patient switching particularly in instances where reformulations are poorly differentiated from their predecessors.

Benchmarking relative pricing To benchmark relative pricing, the average ex-manufacturer price of a number of different reformulations over the first four quarters following launch in the US market was compared with the average ex-manufacturer price of the preceding formulation within its respective brand franchise. Table 6.11 illustrates this process by comparing the average price of a weekly supply of Eli Lilly’s Prozac (fluoxetine) 20mg tablets 222

with that of Prozac Weekly over the four quarters following the launch of the reformulation in the US. This analysis indicates that during its first four quarters, the Prozac Weekly formulation of fluoxetine was priced at a 7% discount to a weekly supply of 20mg tablets. Table 6.11: Calculating relative pricing – Prozac 20mg versus Prozac Weekly Quarters following US launch Q1 Q2 Q3 Q4 Prozac 20-mg ex-manufacturer price per day ($) Prozac 20-mg ex-manufacturer price per week ($) Prozac Weekly ex-manufacturer price per week ($) Relative ex-manufacturer pricing (weekly price of Prozac weekly/ weekly price Prozac 20-mg)

2.26 15.81 14.98 95%

2.32 16.23 15.12 93%

Average weekly ex-manufacturer price of Prozac Weekly relative to a weekly supply of 20-mg tablets Source: MIDAS Sales Data, IMS Health, March 2004

2.34 16.35 15.07 92%

2.30 16.11 15.03 93%

93%

Business Insights

Figure 6.17 provides a summary of the relative prices of 25 reformulations grouped by strategic type. This analysis suggests that manufacturer’s pricing strategies for reformulations are influenced by a reformulation’s strategic type.

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Figure 6.17: Comparative analysis by strategic type – relative average US pricing four quarters following launch for 25 reformulations

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Generic defence reformulations Generic defence reformulations Patient sw grow itching reformulations Switch and reformulations

Source: MIDAS Sales Data, IMS Health, March 2004

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Su ama x st iv (7 lX Ac a (6 0-m L Zom 00 to g) ne ig l ( mg) ZM 3 D 5 T et -m ro g) Zo lL la A de Co x Sa pa Be fe xo ta Sy ne se st ro em n

Zyprexa Zydis

Le s

XR ax

LA

Xa n

60

Ri ta lin

Kl on

op in

wa fe rs

100

80

Re na ge l

Ri sp

er da l

M -T ab

120

(8 00 -m g)

140

Expand expansion and grow reformulations Patient reformulations Market grab reformulations

Business Insights

Patient expansion strategies Patient expansion strategies seek to access new opportunities and grow sales in an additive manner. The ability to access new treatment settings, patient populations and indications often requires significant differentiation from existing formulations of the parent molecule. Successful execution of these strategies require reformulations to be differentiated, offering value to stakeholders that can be translated to premium pricing.

Patient expansion reformulations exhibit the greatest degree of variation in relative pricing. Of the five reformulations within this grouping, the intravenous formulations, of the antibacterial Avelox, (moxifloxacin) the gastrointestinal drug Protonix (pantoprazole) and the intramuscular formulation of the antipsychotic Geodon IM

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(ziprasidone) are all priced at significant premiums to their oral predecessors. These are all low volume products, developed for use in acute treatment settings in which patients are typically extremely sick and efficacious treatment is highly ’valuable’. Due to the high value placed on effective treatment and the fact that these reformulations cannot be readily substituted with other formulations of their parent molecules within their brand franchises they are capable of commanding high price points without limiting uptake.

The remaining two products within this grouping are Lilly’s Zyprexa Zydis, the orally disintegrating reformulation of the atypical antipsychotic olanzapine and the oral liquid formulation of Forest’s antidepressant Celexa (citalopram). Both of these reformulations, while increasing the range of treatment options available for oral therapy within their respective indications and providing improved convenience in patient groups for which oral therapy is often difficult, in most cases can be substituted with existing formulations within their brand franchises. Therefore, compared to Avelox IV, Protonix IV and Geodon IM, Zyprexa Zydis and the oral liquid formulation of Celexa are less differentiated from other formulations of their parent molecules in terms of therapeutic value thereby limiting premium pricing potential. On this basis, it could be argued that the difference in premium pricing achieved by Zyprexa Zydis in relation to the oral liquid formulation of Celexa is due to the fact that Zyprexa Zydis is slightly more differentiated from other formulations within its brand franchise than liquid Celexa is differentiation from Celexa tablets. While the oral formulation of Celexa simply provides increased convenience, Zyprexa Zydis’ fast dissolving formulation can provide benefits in the treatment of patients experiencing breakthrough symptoms associated with schizophrenia or bipolar mania not offered by oral therapy with ‘regular’ Zyprexa. In this respect, Zyprexa Zydis offers additional value.

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Patient switching and generic defence strategies Unlike patient expansion, patient switching and generic defense strategies seek to maximize a molecule’s sales potential within its existing market, specifically, within the same indications, treatment settings and patient populations. Importantly, both of these strategies require switching patients from an existing formulation to a new and differentiated reformulation.

Discount pricing can be particularly important in providing an additional switching incentive for physicians and patients in instances where reformulations are poorly differentiated from their predecessors. In contrast to patient expansion strategies, a number of the patient switching and generic defense reformulations included in the analysis were priced at a discount to their predecessors following launch.

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Figure 6.18 provides data comparing the average ex-manufacturer price of patient switching reformulations as a percentage of their predecessors over the first three years following launch with the average ex-manufacturer price of generic defense reformulations relative to their predecessors. For both of these groups, on average, reformulations are launched and maintained at a discount relative to their predecessors.

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Figure 6.18: Relative average US pricing – patient switching versus generic defense

Reformulation average price as a % of previous formulation’s average price in the US

105 n=14

100

95 n=7

90

n=6

n=3

n=5

85 n=4

80

75 Q1

Q2

Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Quarters following launch of reformulation in the US

Q12

Average for andswitching grow reformulations Average forswitch patient reformulations Average for defence reformulations Average forgeneric generic defence reformulations

Source: MIDAS Sales Data, IMS Health, March 2004

Business Insights

Over the three-year period following launch, on average, the ex-manufacturer price of patient switching reformulations was held at between 95-100% of the ex-manufacturer price of their predecessors. Exhibiting slightly greater discounting, the ex-manufacturer price of generic defense reformulations was 90-95% that of their predecessors.

While there is little separation between the two groups based on average relative pricing, on balance, the data suggests that generic defense reformulations tend to be priced at a discount more often than patient switching reformulations.

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Figure 6.19 separates patient switching reformulations that are priced at a premium to their predecessors from those priced at a discount and provides average quarterly data for each of these two groups over a three year period. Figure 6.19: Relative average US pricing 12 quarters following launch in patient switching reformulations

Reformulation average price as a % of previous formulation’s average price in the US

115 110 105

n=6

n=1 n=3

n=5

n=2

100 99

97 95

95

n=8

97

99

96

95

94

99

98

97 92

93

n=1

90 n=5

n=6

85

n=4

80

n=2

n=3

Q1

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9 Q10 Q11 Q12 Q13 Q14

Quarters following launch of reformulation in the US Average of discounted reformulations Average of premium reformulations

Source: MIDAS Sales Data, IMS Health, March 2004

Average across premium and discounted reformulations

Business Insights

Ten (62%) of the sixteen patient switching reformulations within this analysis were launched at parity or at a premium to their predecessors compared with only two (30%) of the seven generic defense reformulations. Of the six patient switching reformulations priced at a discount to their predecessors, in at least two cases discounting can be attributed to low levels of differentiation exhibited by reformulations in relation to their competitors and the presence of significant generic competition within their markets:

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Ritalin LA (methylphenidate extended-release) – Novartis’s Ritalin LA was the third major once-daily ADHD formulation to reach the market behind Johnson & Johnson’s Concerta and Shire’s Adderall XR, as such, while substantially differentiated from Ritalin, Ritalin LA was not substantially differentiated from the two market leaders; Xanax XR (alprazolam extended release) – the patent on Pfizer’s benzodiazapine Xanax expired in the US in 1994, but an extended release formulation, Xanax XR, was launched in 1996 in the US. Xanax XR has helped to maintain franchise sales despite strong competition from the many generic benzodiazepine products in the market, some of which are being sold at prices as low as a fifth of that of Xanax. Xanax XR’s discount is likely to have been set to drive patient switching and reduce the price differentials between brand and generic.

Ritalin LA and Xanax XR have been categorized as patient switching reformulations in the analysis, as generics were already in the marketplace prior to their launch. As such, the objective for these reformulations at launch is more akin that of patient switching strategies than that of generic defense – in this instance, generics simply make up one component of the competitive landscape. However, due to the pricing pressure introduced by generics, and the low levels of differentiation from competitors the relative pricing of Ritalin LA and Xanax XR cannot be expected to be aligned with ‘true’ patient switching reformulations which are typically launched in the absence of generics. In at least one case, reformulation was employed solely to provide a product with a competitive pricing advantage: Lescol XL (fluvastatin) – the discount of Lescol XL (fluvastatin extended-release once daily) relative to Lescol (fluvastatin 40mg twice daily) is due to the fact that the extended release formulation was developed for the very reason of reducing the cost of daily fluvastatin treatment, reinstating its position as a cost-effective me-too product in the dyslipidemia market.

Like Ritalin LA and Xanax XR, the discounting exhibited by Lescol XL is anomalous. The discovery that the original formulation (40mg) was not effective at the original 230

recommended once daily dosing resulted in the recommended dose increasing to 40mg twice daily, thereby pushing up the price of treatment. As such, Lescol XL appears to be discounted because of an unexpected inflation in the price of daily treatment with its predecessor. If compared to the original 40-mg per day dosing, no such discount is observed.

If Ritalin LA, Xanax XR, and Lescol XL are excluded from the patient switching group and the difference in relative pricing between switching and generic defense reformulations becomes more obvious.

Generic defense reformulations The introduction of generics increases pricing pressure within a market. However, given the extent of price differentials that typically exist between branded products and generics, the degree of discounting seen in this group of generic defense reformulations is unlikely to have been intended to enable reformulations to compete with generics on a price basis. Discounting is more likely to be based upon issues related to timing and competitive differentiation.

In generic defense strategies, the need to switch patients rapidly is likely to be more acute than in patient switching scenarios. As discussed previously, a number of the generic defense reformulations within this analysis were launched in the US less than a year prior to the incursion of generics. Limited time between reformulation launch and generic incursion increases the value of being able to switch patients rapidly to a patent protected formulation. Conversely manufacturers executing patient switching strategies are afforded more time to execute a switch and therefore have more flexibility in terms of striking price point vs. switching rate trade-offs.

In addition to time pressure, the lower relative pricing among generic defense strategies may also reflect the low degree of competitive differentiation exhibited by generic defense reformulations as described in the competitive differentiation section of this chapter. Competitive differentiation is an important success factor and in its absence

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launching a reformulation and a discount can be used to compensate for low differentiation and promote switching on a cost basis.

In generic defense strategies price premiums are only likely to achievable without an impact on uptake if a reformulation is sufficiently differentiated in terms of its value proposition from generics. GlaxoSmithKline’s sustained release reformulation of its aminoketone antidepressant Wellbutrin (bupropion) provides one example of a generic defense scenario in which premium pricing and strong uptake were achieved.

The availability of generic bupropion, marketed by four companies in the US, forced GlaxoSmithKline to adopt a defensive stance over Wellbutrin SR, the sustained release version of the product. While the premium pricing strategy adopted was expected to negate the possibility of Wellbutrin growing very strongly, the benefits of Wellbutrin SR over standard Wellbutrin in terms of patient compliance, convenience and a good side effect profile was sufficient to drive sufficient to drive growth.

Strategic pricing at patent expiry A branded manufacturer has a limited number of options with regard to pricing at patent expiry, it can either increase its price, decrease it, or maintain it at a constant level. There are however a number of ways in which each of these pricing strategies could be implemented.

Where limited generic competition is anticipated, or where high levels of brand loyalty is expected to retain a segment of the customer base post patent expiry, there is a strong case for maintaining or even raising the price in order to sustain sales value. Also, increasing the price prior to generic entry can result in generic prices being set at a higher level upon entry. In most cases though, significant price increases will not be possible in Europe, due to strict governmental pharmaceutical price controls.

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Implementing a price decrease at or prior to patent expiry allows brands to compete on a price basis with generics, and may enable the company to maintain its relationships with wholesalers and pharmacists by offering a known and trusted product and service while going some way to matching the generics manufacturers on price.

US patent expiry Brand companies that cut their prices in the face of generic competition are often faced with a corresponding decrease in price of the generic. The rise of Indian generics players, with extremely low cost bases has increased the level of price competition seen in the US generics market, particularly within the commodity generics sector, where this is unlikely to be an attractive strategy for the branded company.

As patients in the US vary in their level of cost sensitivity, depending on the nature of their insurance coverage, branded companies have the potential to retain a segment of the market that is not cost-sensitive, and it can therefore pay to maintain the price of the brand post-patent expiry (in price inelastic segments of the market, there may even be the potential to increase the revenue generated, by reducing the discounts offered by the pharmaceutical company to pharmacists and wholesalers) in order to follow a maximize value strategy. For instance, patients covered by a fee-for-service/ indemnity plan, who pay high monthly premiums but enjoy full medical coverage are unlikely to be motivated to switch from the branded to generic version. Meanwhile, patients enrolled in HMO plans are likely to be subject to restrictive formularies with tiered patient co-payments, with financial incentives to use the generic. As the proportion of patients enrolled in indemnity plans decline, and these plans increasingly adopt the pharmaceutical cost containment methods used in managed care, the potential of the branded industry to profit from this strategy may be reduced.

European patent expiry There are effectively three ways a manufacturer can reduce the price of its product:

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cut list price – cutting the official list price for a product may not be an attractive strategy, as it risks parallel importing into other European markets, can reduce the price of the brand in non-patent expired markets that use external reference price systems, and reduces the price for all parties, even those that might otherwise pay the higher price. In some markets though, it may be necessary to drop the price if the brand is to retain reimbursement status; selective price cuts – companies can offer packages for wholesalers to reward high volume users. Such a strategy can be particularly effective in the hospital environment, where companies can sell off-patent products as part of a bundle with their newer brands; discounts/rebates – a manufacturer may prefer to give a rebate than drop their price. This gives wholesalers and pharmacists an incentive to dispense the company’s product by improving their profit margins on sale of the brand.

In the UK mandated price cuts under the PPRS have in the past offered flexibility as to which drugs in a company’s portfolio the cuts could to be applied to. The result is that older, off-patent brands had their prices disproportionately reduced, and perhaps benefited from reduced levels of generic erosion, while prices of newer brands were maintained at higher levels than would otherwise have been possible. This popular “brand equalization” strategy will be removed with the introduction of a revised UK PPRS in 2005, which specifies that price modulation will not be allowed to include price reductions made on products with SPC or patent expiry occurring between 1st July 2004 and 1st January 2006. Nor will companies be allowed to include sales where additional discounts result in branded products being dispensed against prescriptions written generically.

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CHAPTER 7

Appendix

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Chapter 7

Appendix

Glossary ANDA

Abbreviated New Drug Application, a shortened version of a new drug application (NDA) submitted instead of an NDA for approval of a new formulation of an existing drug or investigational drugs that are similar to already approved drugs including generics

BIO

Biotechnology Industry Organization, an industry organization representing the interests of biotechnology companies

Bungyo

the separation of the prescribing and dispensing functions

GDP

Gross Domestic Product, a measure a national wealth

HMO

Health Maintenance Organization, a private health insurance in the US combining a range of coverages in a group basis

MCO

Managed Care Organization, a health care plan designed to provide medical services through groups of doctors, hospital and specialty providers

Medicaid

a statutory insurance scheme made available by the US government to people below a certain income who are unable to afford private health insurance

Medicare

a federal insurance scheme made available by US states for people over the age of 65

MHW

Ministry of Health and Welfare, the government department overseeing national healthcare expenditure in Japan

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NHI

National Health Insurance, the national healthcare reimbursement body in Japan

NICE

National Institute of Clinical Excellence, a Special Health Authority

covering

England

and

Wales

producing

and

disseminating clinical guidelines, both for medicines and medical technologies Parallel imports

the transportation of a pharmaceutical product from its original market, where it was sold directly by its manufacturer or marketing partner, to a different market for resale by the importer

Pharmacoeconomics the application of economic principles to the use of drug therapies, allocating a monetary value or qualitative measurement to alternative treatments and their outcomes in order to achieve the most efficient allocation of limited healthcare resources PhRMA

Pharmaceutical Research and Manufacturers of America, an industry organization representing the interests of pharmaceutical companies

Yakkasa

the difference between the reimbursement price and purchase price for Japanese pharmaceutical products

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